Aftershocks from last year’s inflation surprises and hurried policy response have continued to reverberate through the real economy and financial sector, leading to wild swings in fixed income market prices. Bond investors must now decide whether it’s time to remain cautious, selectively add risk, or take a wait-and-see approach.
Investment ideas for the quarter ahead
Find ways to position for a turning policy cycle while guarding against uncertainty.
Lucy Brown, SPDR Fixed Income Product Specialist and Jason Simpson, Senior Fixed Income ETF Strategist provide a brief overview of the major themes in this quarter’s Bond Compass.
Lucy Brown: Q2 continues to bring opportunities in FI despite the uncertainties that lie ahead. What are the flows telling us?
Jason Simpson: The first quarter was an interesting one for flows with investor buying of US Treasuries – strong for so long – but then unexpectedly softening post the US banking troubles. An unusual risk-off move.
Flows into corporate credit also slowed during the quarter, most notably for EUR exposures as it became evident that there was more tightening in the pipeline from the ECB. But Emerging Market debt remained relatively well supported.
LB: This year inflation and the looming US recession remains at the forefront of everyone’s mind, what can we see from the PriceStats?
JS: The State Street Global Markets PriceStats indicator of inflation is falling in both the US and Europe but it is premature to declare victory over inflation as this is mainly base effects. In Europe in particular it is clear that the inflation problem is not yet over and that the central bank has more work to do.
There is, however, better news from Emerging Markets where there has been a clear turn in the inflation impulse.
LB: With the on-going changing landscape what do we see as the main opportunities for investors in Q2?
JS: In terms of key investment strategies for the coming quarter, following some relatively strong returns in Q1 we stick with the view that US investment grade credit should provide a higher yield and more stability than government only exposures. We also like European IG but, given the ECB remains in tightening mode, something a little more tactical on the duration front should be considered.
Emerging market debt could continue to be a draw for investors. There are high yields on offer, we believe the central bank cycle is on the turn and USD depreciation can continue to act as a support for returns.
Lastly, the top to the central bank cycle is often marked by a period of volatility. One way to diversify risk is through global aggregate exposures which contain bonds from a large number of countries and many types of issuers.
LB: Thank you for listening, the full version of our Q2 Bond Compass publication is available now on our website.
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