In brief
- Fixed income investors face an increasingly complex investment landscape as unique, once in a lifetime monetary, credit and fiscal cycles converge amid elevated geopolitical uncertainty and dynamic bond–equity correlations.
- The outlook for interest rates is uncertain, given contrasting expectations for the near-term and long-term effects of artificial intelligence (AI) on inflation, labour markets and the broader economy. ‘Fresh thinking’ at the US Federal Reserve under the leadership of newly appointed chair Kevin Warsh injects additional uncertainty, structurally increasing the potential for volatility across rates markets and curves.
- In credit markets, a fast-moving AI capex supercycle is driving record public and private debt issuance, accelerating dispersion into AI ‘winners and losers’, for each stage of the AI roll-out, and increasing the need for rigorous bottom-up credit analysis.
- A major fiscal shift is also underway, with governments running widening deficits even while growth remains resilient, potentially increasing curve volatility and dispersion across sovereigns, sectors and maturities as investors digest the extra supply.
- Fixed income investors can strengthen their core portfolio exposure by allocating to strategies that are managed without traditional benchmarks, providing nimbler and more flexible ways to capture opportunities and manage risks effectively.