With the US labour market at full employment, annual wage gains at 5% to 6%, and inflation at levels that are incompatible with the Federal Reserve’s target, we expect US policy rates to be raised to 3.25% to 3.50% by year-end 2022. Our view is that the Fed needs to engineer a significant economic slowdown, and most likely a recession, to bring wage pressures down.
We expect the ECB to enter on a less aggressive path for monetary policy tightening as it weighs up high inflation and labour market shortages against the downside risks to wages and economic growth.
In the near term, we see a risk that ‘peripheral’ eurozone spreads will underperform.
Investment-grade corporate bond valuations are now closer to their long-run averages and we expect credit to outperform government bonds from here. This will come primarily from the higher coupon, however, as opposed to a narrowing of spreads, so we are neutral within credit.
In emerging markets, 2022 should be the year of the ‘great normalisation’ of Asian spreads. We believe that outsized returns are likely to be driven by Asian high-yield bonds.
These are highlights from our quarterly fixed income outlook. Download the pdf.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.