At a crossroads as rates rise? Here’s what a bond indicator is telling us
Rising government bond yields have presented more room to manage the impact of rate hikes. How big is this leeway?
These are tough times for income investors where market volatility still persists, the macroeconomic outlook remains uncertain and central banks are forced to pivot hawkishly to tame soaring prices1,2.
We share how we navigate interest rate risk and where we see opportunities1.
A view of the hawkish journey ahead
The global economic outlook will continue to be shaped by developments on inflation and labour market fronts as well as the scale, speed and duration of central bank tightening2.
Without a resolution to the Russia-Ukraine conflict, energy and food prices are unlikely to fall without government subsidies.
Tight labour markets in the US and the UK imply that wage gains are likely to be persistent, reinforcing higher prices in housing, goods and services.
The Federal Reserve continues to aggressively increase the federal funds rate in order to tame persistently high inflation. We believe the interest rate could rise from its current level to at least 4.75% in the near term.
Still, this is not to say that everything is bleak. US and European corporate balance sheets have continued to remain strong. The US consumer and state and local governments have built up excess savings in deposit balances and rainy-day funds respectively, while fiscal aid has been deployed to help offset higher energy costs.
Where we see opportunities1
Under current market conditions, we believe that some fixed income sectors can still present opportunities.
Annualised returns and volatility