From NICE to VILE—The Future of Inflation
We explore the type of inflationary environment that we might expect across developed markets in the future and its potential effect on global asset prices.
Investors experienced a ferocious rally as 2023 concluded, taking rates sharply lower and spreads tighter. After a pause, the rally will likely resume, albeit at a slower pace. And that continuation may occur with all-in yields hovering near multi-year highs, signaling that we’re still at a strategic buy point for bonds. Explore our Q1 Market Outlook for a bond market overview, assessment of the global macroeconomic landscape, and sector overviews in which our portfolio managers highlight the associated risks and opportunities within their respective asset classes.
Learn more about the four key themes that shape our quarterly fixed income outlook:
We have experienced ferocious moves in rate and risk markets on the heels of moderating economic data and the Federal Reserve's pivot towards rate cuts. After market participants piled into the market as 2023 wound down—taking rates lower and spreads tighter—a pause is definitely in order before the rally resumes, albeit likely at a slower pace.
True, credit spreads are tighter—much tighter on high yield bonds. But yields on investment grade indices are comparable to year-end 2022 levels, and central banks are, in all likelihood, done raising rates: i.e., we are still at a strategic buy point for bonds.
Against a backdrop of deteriorating geopolitical relations, hot and painful regional conflicts have become the order of the day. While major economies may not be impacted at present, at a minimum, a surge in energy prices represents a risk in 2024. U.S. politics—potential government shutdowns, mandatory spending cuts, and, of course, the presidential election—could return to the fore as was the case in 2016, think “taper tantrum with a negative ratings development for U.S. Treasuries.”
In the end, 2024 may be a lot like 2023: a bull market year that leads to solid returns. But last year was about so much more. Spreads, rates, and currencies all experienced wide swings, not only presenting risks, but also opportunities to add value through diligent active management. With uncertainty high and an increased likelihood of large and repeated market swings, the alpha opportunity set should be broad and deep. Therefore, 2024 stands to be taxing, but ultimately rewarding, for investors.
We explore the type of inflationary environment that we might expect across developed markets in the future and its potential effect on global asset prices.
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We explore the historical transmission from tighter monetary policy to corporate bond spreads and the respective investment implications under our "weakflation" scenario.