Fixed Income 2022

This is an interesting time to discuss fixed income. Inflation has reached multi-decade highs, energy costs are shooting up, central banks are to stop buying bonds, interest rates are expected to rise several times and we now have war in Ukraine. We brought institutional investors, asset managers and a consultant together to find out how they are navigating the markets during such interesting times.

April 2022

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This is an interesting time to discuss fixed income. Inflation has reached multi-decade highs, energy costs are shooting up, central banks are to stop buying bonds, interest rates are expected to rise several times and we now have war in Ukraine.  

To find out what impact these events are having on assets that provide a regular income we brought institutional investors, asset managers and a consultant together to find out how they are navigating the markets during such interesting times.


Ben Clissold
Head of fixed income and treasury Universities Superannuation Scheme (USS) Investment Management

Ben Clissold has led USS Investment Management’s fixed income strategies since in January 2020, covering government bonds as well as non-government and emerging debt. The maths graduate from Durham University joined the scheme from BlackRock, where he managed its $350bn (£268bn) LDI business in EMEA and chaired the investment oversight committee. Prior to that, Clissold honed his skills at firms including ING, P-Solve and State Street.

Huw Evans
Director BESTrustees

Huw Evans chairs six of the seven pension schemes for which he is a trustee. Before joining BESTrustees in 2014, he spent seven years at Willis Towers Watson specialising in pension scheme valuations, mortality and professional affairs. He has also been part of the management team in Hewitt Bacon & Woodrow’s combined benefits consultancy and administration department. Evans was a volunteer for the Institute and Faculty of Actuaries for many years, chairing its pensions board.

Celene Lee
Principal Buck

Celene Lee has advised pension schemes on investment and financing matters for more than two decades. Before joining Buck, she advised defined benefit pension scheme sponsors on investment strategy, manager selection, liability hedging, de-risking and default fund design for a global consultancy. Lee has also spent time on the provider side as global head of pensions at Moodys Analytics, which provides asset and economic risk modelling to pension investment consultancies, banks, insurers and asset managers

Lloyd Thomas
Portfolio manager Border to Coast Pensions Partnership

Lloyd Thomas oversees Border to Coast’s externally managed fixed income funds. He joined the pool in April 2021 to establish a multi-asset credit fund. Thomas brings more than 12 years’ experience of managing absolute return strategies to the pool during his time at Insight Investment and Mediolanum Asset Management.

Mark Nash
Senior investment manager, Head of fixed income alternatives Jupiter Asset Management

One of Mark Nash’s responsibilities as head of fixed income alternatives at Jupiter is to manage its Strategic Absolute Return Bond fund. He joined Jupiter in 2016, 15 years after he began his investment career at Invesco. Nash rose to head of multi-sector fixed income at the firm managing its flagship Invesco Bond and Invesco European Bond strategies.

Colin Reedie
Head of active strategies Legal & General Investment Management

Colin Reedie has 30 years of bond market experience, specialising in non-government debt. He is currently responsible for LGIM’s global credit strategy as well as its London-based fixed income and global equity teams. He joined the firm in 2005 from Henderson Global Investors where he was head of investment grade credit funds. Reedie has also held positions at Scottish Widows and Scottish Amicable.

Scott Freedman
Fixed income portfolio manager Newton Investment Management

Scott Freedman focuses on global investment-grade and high-yield bonds in the energy, consumer and healthcare sectors. He co-manages the Newton Sustainable Sterling Bond strategy and is part of the firm’s portfolio management team dedicated to all sustainable fixed-income strategies. A chartered accountant by training, he joined Newton in 2009 after spending three years analysing the high yield credit market at Standard Asset Management.

How important is fixed income to institutional investors?

Huw Evans: It is linked to the maturity of our schemes. Many are looking to buyout within 10 years and that is driving the thinking around fixed income, which is a big part of their de-risking strategies.

Ben Clissold: We are at the other end of the scale being an open scheme accruing £2bn of liabilities a year. Although we are keen on hedging and taking the right amount of risk within fixed income relative to our liabilities, it is not possible to lock that down over such a long period because we are likely to be open for quite a while. Some of our sponsors have been around a long time, so there are a variety of views on where we should be on the risk-return spectrum. The University of Oxford, for example, delights in telling us that they have been around 500 years longer than the gilt market, so there is no need to hedge our interest rate and inflation risks because they will be here long after it has gone.

Lloyd Thomas: I work on Border to Coast’s new multi-asset credit (MAC) fund. Our investors traditionally hold equities and gilts, and the MAC fund aims to help our partner funds to fill in the middle ground. This is an important element that needs to be built to expand our investors market exposure.

How are alternative fixed income assets performing?

Mark Nash: I run a global macro fund, which can go long or short and access all areas of the fixed income universe. There is no benchmark, we try to outperform the underlying market. Now is our time with global bond yields rising. It has been a long time coming. Competing with long-only funds has been difficult. We have kept pace, but those guys can just sit in beta and perform. Our fund’s volatility is similar to that in a bond fund, but in a bear market it is easy for us to outperform and we have made a positive return so far this year.

What are your clients discussing when it comes to fixed income, Colin?

Colin Reedie: We have a variety of institutional clients on various stages of the journey towards end-game. There are those seeking yield and those taking a cashflow-matching approach. We are servicing those needs, but the number one topic is the back-up in yields and how persistent is it going to be.

2021 was not a great time for fixed income. Are there better times ahead?

Scott Freedman: The first quarter of 2021 was interest rate driven, but there were periods through the year when it was a good environment for high yield, given the growth backdrop. But there are concerns around the cycle and inflation and what they do to the fundamentals. We will see increasing volatility this year. One area driving that is the authorities’ response to Covid and the levels of stimulus that came into the markets. We were late in the cycle when Covid hit, but the period to close the output gap the stimulus created was quite short. So, we approach the end of the business cycle faster this time because the cycle has been compressed. Company fundamentals have been strong, but to what extent will they be impacted by higher costs? Also, are some areas of the market vulnerable to slower growth? It is about being nimble within fixed income in a more volatile environment as yields continue to rise.

We are speaking on the eve of what could be an invasion of Ukraine. What impact is this having on the bond markets?

Nash: The fundamentals win out in the end. We are still in stalemate and waiting to see what happens. The bond markets sold off quickly, but there was not much of a rally at the front end. That says inflation is a big problem. It has surprised to the upside into this year and growth is good and well rounded. You have to hold your nerve. Look at the price action and you can tell the fundamentals are pointing to high yields.

What will happen to the inflationary picture?

Reedie: The market is going from a “don’t worry, it will be transitory” narrative to “we might have a stickier problem”. I sense we are looking to price how persistent it is going to be. Headline inflation has probably peaked. As we re-open and supply chains normalise, the eye-popping numbers will tail off. That is largely in the price. Everyone has their models and can see it coming down, but what will be revealing is if wages continue to rise. Markets will focus on it because central banks will have to remain hawkish. History suggests that behaviours do not change after a major upheaval, but something is happening in the labour market. People are taking lifestyle decisions in keeping themselves out of the labour force for longer to enjoy life more or are changing not just jobs, but industries. This is radical stuff. This is leading to a shortage of working-age labour. If this continues, it will be difficult to see it not manifesting itself in broad-based wage growth, which means this is a longer-term issue.

Celene Lee: Asset owners worry about rate rises and bonds losing money, but defined benefit funding levels are as high as they have ever been. That is a critical point as, unlike five to 10 years ago, many schemes are well funded and often close to fully hedged on rates and inflation, which means they are passed the point of worrying about rate rises. Yes, they may be worried about inflation, but many schemes have good protection. Many also have a pension cap often at 3% or 5% and the Retail Price Index at around 7%. Financially, at least, schemes are well looked after in that sense.

Clissold: There are some interesting dynamics about that cap. We have had fundamental inflation worries driving the front end, but the back end has seen liability-driven investing hedges unwind, which is an interesting dynamic causing a curve inversion. It is something we look to take advantage of.

Evans: The recalibration of inflation hedges is cropping up on agendas for trustee discussions. As inflation expectations approach the caps on pension increases, the nature of the hedge you need changes from being a real hedge to a nominal one. That is a hot topic.

Clissold: The reaction function in developed market central banks is different to those in emerging markets. That feeds into our thought process. We own significant inflation hedges outside of the UK, which makes a difference to what we are thinking about and how we manage inflation risk.

What impact will central banks ending their bond buying programmes have on the market?

Nash: The Fed does not want to surprise the market. In 2018, they over hiked, there was not much inflation and the world was slowing. The whole thing blew up, so they had to do more quantitative easing. The Fed is more cautious, but this is the time when they need to go quickly. Now they are behind the curve in a sense because Consumer Price Index (CPI) inflation is a problem in the US, which is why the yield curve is flat. One thing I will say about the Fed is that waiting until the pandemic ended was a good move now that the world is in such good shape. Now they need to front load it, which is what the markets have been pricing in, and get tightening because CPI is a problem.

Thomas: Will they unwind their balance sheet?

Nash: They want a weak dollar and a steep curve. So, they do not want to do too much purely at the front end. They will do double the quantitative tightening they did in 2018 and hopefully get away with fewer hikes. That is what they want in a perfect world, but it does not always go that way.

Reedie: 2018 is an interesting comparison because you can feel the tension every time yields back up. We were comfortably over 3% back then and it did not end the cycle. Economically, the US is in a far better place now in terms of corporate balance sheets with personal balance sheets being supremely robust. This is where they have a problem this time. They pivoted early enough to stop the cycle ending in 2018, but it was a massive mea culpa at the beginning of this year when they held their hands up and admitted that they were shockingly behind the curve. Markets are discounting mechanisms, and they savagely moved the front end.

Thomas: It was interesting in January when the Fed released their principles of how they will unwind their balance sheet. It was a shot across the bows, but they are fearful of another taper tantrum so they are giving more guidance. They do not want to shock the market as they did in 2013 when real rates moved aggressively. If that happens again, given the mountains of debt we have and the valuations in equity markets, it would be a catastrophe. The timing of unwinding their balance sheet is key and they still have 10 25 basis point rate hikes to get back to 2.5%. To 3% takes 14 hikes, so there is a lot on their plate.

We will not get there in a straight line. It is going to be difficult and there could be hick-ups along the way which may force the Fed to step back from aggressive rate hikes. The steeper the hiking cycle the greater the volatility. The filtering out of volatility, down the risk spectrum, is a worry. It is fascinating what is going to happen. There are so many connotations.

Lee: What is interesting about speculating when rates will rise and by how much, is that in February the Bank of England voted to increase rates by five votes to four. The four were not voting against a rise but wanted to increase rates by even more. That did not make a loud enough headline.

The other fascinating point which has not been talked about enough is the amount of quantitative easing (QE) we continue to have in the system. Back in 2009 when we started this we thought: “My God, we are printing money!” Just before March 2020 we had £445bn, at that point, we have had more than a decade of QE and we were anticipating it to be unwound.

Then bang, the pandemic hit, lockdowns, and by the end of 2020, QE more than doubled to £895bn, and yet no one has talked much about how the unwinding process will work. We know rates are going to rise slowly and they will manage that gradually, but almost £900bn is no small sum.

Freedman: The Fed is conscious of causing too much volatility in equity markets. But I wonder if there is a regime shift underway, because they will have a problem if they do not address inflation. Maybe they need to go hard and fast at the beginning with a 50-basis point hike. If it ends up that economic growth slows faster than expected because of the breaks they are putting on in terms of the cost of credit, perhaps hikes are not enough and they will, therefore, need to front load. If you look at inflation in 2019, it was high, certainly in the US. This is not a one-year phenomenon.

Nash: That is slowly bubbling out of the curve again. Central bank forecasts go up and then back down again, so conveniently inflation will be back to target within a year. After the last CPI prints, inflation is bubbling along the curve and is looking problematic, which means they will have to change as real rates are far too low. They can rally on the back of Putin, but that rally will not last because inflation is creeping up.

Freedman: If you look at what is priced in, the Fed is still behind the curve. In New Zealand, yields are rising so the market will continue to test what is priced in.

Nash: Does the curve invert without recession risk?

Thomas: In the UK, yes. In the US, I don’t know.

Nash: My general view is that things are good. Rates are rising and so we are seeing a rotation in risk markets, a re-pricing of credit. Do not confuse that volatility with a recession, but the problem is we have this inflation growth mix going on.

The inflation part of that is getting worse, which contributes to the volatility. It will calm down. The global economy is in good shape. I am trying to stay reasonably long risk, but, on the other side, I am short in credit. This is not leading down a path to recession. It is just that in the near term, inflation is causing more volatility.

Freedman: Even if there is a recession, it is a technical term for negative growth. It does not necessarily mean there will be a jump in bankruptcies. Due to the response to Covid, it feels like we are back to boom and bust. We might be in a technical recession, but it does not mean it is a disaster for higher leveraged parts of the world.

Clissold: I am nervous about central bank independence. There has been a lot of pressure on them from politicians about quantitative easing. It will not take a lot of pain for governments to review what their central bank’s mandate is.

Reedie: It is an interesting point in terms of the sheer amount of money thrown at the problem. The baton has been passed from monetary to fiscal policy. That is a significant change in the political and intellectual backdrop around how you respond to cycles and challenges.

Look at who is steering the ship. The ex-head of the Fed is in charge of the Treasury, an ex-politician is in charge of the European Central Bank and the ex-head of the European Central Bank is in charge of Italy. There has been a de-siloing.

A central bank’s remit being monetary policy and fiscal being thrashed out in cycles has gone. Fiscal is now the primary economic stimulant and monetary is the brakes. And they are late on brakes. There are many reasons to continue deploying fiscal policy. You have almost given the keys of the henhouse to the fox, in that they have discovered what they can do with this.

There will not be an inflation or wage number that makes the market freak out. It will be as yields rise we get evidence that economies are coping and there is a higher resilience to rates than we thought. We are coming off such a low base. We are in much better shape than in 2018. It is interesting to hear the views of institutional pension funds, who are in great shape.

This is a market issue, a behavioural issue, this is an issue of a lot of risk takers never having operated in an environment of positive bund yields before. It feels behavioural with people looking over their shoulder saying it feels horribly different and they do not understand it. That is playing out in higher volatility. The pandemic fast-forwarded everything, including to the end of the cycle. I wonder whether we could have a moment where we can calm down a bit and that terms the cycle out. Then the conversation gets interesting in that it goes from how can you navigate the path to high yields to how high can yields go?

What is everyone expecting from yields this year?

Reedie: No one will make forecasts because invariably they will be wrong, but there is a plausible path to materially higher rates.

Lee: The Bank of England is projecting a 1.5% base rate by the middle of next year. That is four quarter point rises, which is relatively mild.

Reedie: The key issue is when does the terminal rate get re-appraised. It opens Pandora’s box. If the terminal rate is not 2.5% for five years it would allow yield curves to steepen.

Freedman: Then there is climate spending, where trillions of dollars per year are needed to fund the energy transition. Technically, there is a lot of supply that needs to be funded and it is going to come from debt rather than equity.

Reedie: The next iteration of the fiscal response could be the cost of living. We have an energy price issue in the UK and a petrol price issue in the US. People are screaming about this and governments are stepping in. The French were talking about nationalising EDF to keep bills down. That is a direct response to these inflationary pressures, which lengthens the cycle. You are supressing costs, therefore people are better off. We have talked about the cost of living, but people are being paid more. As wages rise in the US, let’s not forget that consumption is two-thirds of that economy. I would back the US consumer to spend every day of the week and twice on Sunday.

Nash: Lower income wages are going up faster than inflation, so they still have a positive real wage return. The reasons you hear about why yields will not go up include the cost-of-living crisis, but this time around consumer balance sheets are in good health. You also hear about global debt levels. We have been wanting inflation for so long, but when we get it everyone panics. Strong nominal growth is good for yields rising because it improves debt-to-GDP.

Another issue is Europe. Italy and Greece in a good global growth environment should be more sustainable. The European Central Bank is attuned to supplying liquidity because they have had a lot of practice. The Fed is doing quantitative tightening but has set up its standing repo facilities. It is a case of: “We have taken liquidity away, so if you want some, come and ask us for it.” These measures are in place because policymakers have hiked rates in bad and uneven growth environments in the past. Now that we have synchronised growth and well-practiced policymakers, terminal rates will ramp up because things are looking better. It would not surprise me if terminal rates in the US were 3.5% soon.

Lee: Another risk relevant to institutional investors is the interaction between rates rising, inflation and equities. A lot of schemes are well hedged and have an LDI strategy, so the rate rising environment might be okay on a funding basis, but they will have to find the cash for any LDI collateral calls. Historically, moderate inflation is supportive of equity markets, but persistent high inflation tends to bring equities down. Cashflow is a hidden risk if you receive collateral calls just as you need to find liquidity. Where best to find it? You are not going to sell your LDI assets, but you may have some illiquid credit or private debt. The other place to find it is equities. Liquidity management is a risk one has always had to think about in the past, but now the possibility of it happening is more real and less theoretical.

Evans: What does not seem to be particularly well understood is that if a scheme does not have contribution income and its assets fall sharply, it takes a long time to recover.

Will the supply of sustainable debt increase this year?

Reedie: There is a supply/demand imbalance in green bonds. It makes us nervous because we have seen this movie before. When demand for a product outstrips supply, the capital markets system has a shocking record of creating the vehicles to fuel demand, such as LBOs in the late 90s and CDOs in the mid-00s. This is too important an issue to fall foul of the same mistakes. I am nervous around this. That is a public market perspective.

My guess is that there will be a healthy interaction with private capital in these areas. There are too many people jumping on the bandwagon and buying green bonds because they are green. There are not enough questions being asked around why they are green and how you are holding the issuer accountable to whatever commitment they have made. These bonds are being structured for the issuer to take advantage of a lower cost of funding because demand outstrips supply. So, the providers of capital should have more say in what is a fair and measurable commitment to net zero for the company. We are not, which is a concern.

Freedman: Part of it is greenwashing. It is from investors who want to show potential clients how great they are by owning a portfolio of green bonds. It is also companies who want the ‘halo effect’ and cheaper funding. For us, it is about fundamental analysis on a case-by-case basis. A company might have a fantastic green project, but it might be terrible at looking after its employees. So, taking a holistic perspective is important.

Clissold: The asset management industry is culpable here. I receive a lot of unsolicited emails suggesting that this is the corporate bond fund I need because it is green. It has reached the point where they do not say what the return is likely to be. It does not matter about the return because we are investing in green bonds.

Freedman: From a regulatory perspective, that is the next stage. This is going to come under more scrutiny.

Nash: But the article angles are so gentle that it became mainstream to have an Article 8 fund. The guys who are doing sustainable investing seriously leapt to Article 9, so there was a tonne of money going that way. The demand is huge.

Freedman: Some clients do not consider Article 6 anymore for that reason.

Nash: This has been caused by the rules for Article 8 being made too gentle and you may get an overvaluation in some of these assets.

Freedman: A portfolio of green bonds today is mostly in European investment grade, utilities and banks, making it exposed to bund yields rising. There are unexpected risks a client might not realise they are carrying. In 10 years, we may not need labels. It will be differences in the cost of capital and the quality of the transition journey investors look at. We are where we are because of regulation, but we should have to justify why each holding is a good transition story or ESG credit.

Are asset owners under pressure from their stakeholders to buy green?

Clissold: Yes, but we are not under pressure to buy bonds because they are green. There is an acceptance, that given our size, we are better off interacting with companies rather than taking a secondary route via a constructed green bond index which forces us down certain routes. We are fortunate to have a large private markets group which gives us direct access to solar power and wind farms. That is more important for us than funding a green UK government bond.

Freedman: Society has the most to benefit from a higher emitter moving towards lower emissions rather than buying a wind farm credit that might add one or two more wind farms to its portfolio. It is about looking at the bigger picture.

Clissold: What worries us is that the largest polluters are in emerging markets, which makes their cost of capital more expensive in an environment where they need a lot of capital to shift their power production from coal.

Evans: I know trustee boards who are concerned that the rush to green assets is not intelligent enough. They believe they would be doing more for the planet by buying something with high carbon intensity and actively influencing its reduction, rather than following an exclusion policy resulting in carbon intense assets being owned by entities who are not particularly ethical.

Just buying carbon credits has not advanced the carbon change cause. There is some tension between what activists are pushing for, like net zero, and trustees wanting to do the right thing for the planet, which is not necessarily the same path. In practice, schemes are in different places to their sponsor.

Freedman: Some of the labels we have in Europe, in terms of what may or may not be allowed from a sovereign perspective, exclude some of the weaker emerging markets. Regulation and labels go too far and, if you go down those routes, you are denying capital to countries that need it.

Reedie: The public-private angle is important. If you are an allocator of capital, you can do a lot of good by investing across both channels. The risk in being public only is that if you make life unpleasant for a company that hauls stuff out of the ground, they will just offload their coal assets to someone who does not care. You have lost the ability to influence that asset. Return generated for the risk taken is something we already do. The return generated for the impact the investment makes, is a different question and much harder to quantify. We are not there yet.

Thomas: There is a massive demand to do good. It is huge. That is a major point of focus within Border to Coast.

Reedie: Do you want to do good or do harm? It is a binary decision.

Thomas: Yes, it is black and white, but implementing that is our job. To implement it mindfully, sensitively and accurately is what we are trying to do. It is not as straightforward a proposition as a binary outcome.

Lee: My experience of binary investors is that we had a group who ask us to put green funds in their portfolio. So, we picked some green labelled funds and discovered that their portfolio was dirtier than before. So, they were already pretty green without knowing it. That is the problem with trusting a label.

When people were worried about inflation, funds with inflation in their name went up in value because everyone wanted to buy them regardless of whether or not it guards against inflation. At the other end of the spectrum, when you mention green funds to clients their response is: “Does it enhance my return?” So, you have a binary outcome where people don’t care as long as it has a green label, while at the other end of the spectrum there are those who are sceptical about any form of green discussion.

Actually, some green bonds are long dated. One of the longest dated UK green gilts is 30 years, which is great for long-term investors like pension schemes. The devil is in the detail and green investing is evolving. It is our job to educate investors on what is a complex topic. In the context of understanding green, an investor fundamentally has to understand their risk-return profile and liquidity. Green is one equation to an overall problem.

Reedie: It is spectacularly resource intensive to do it properly. Everyone is taking it as what should come with an allocation to fixed income now. When you are under regulatory pressure, of course, you want the cheapest way to satisfy the requirement. At the moment, that is buying a bunch of expensive green bonds.

This does not sound ideal for a just transition.

Freedman: There will be a social taxonomy next in Europe, but it could be delayed by a few years. There are different regions in Europe with different social constructs and priorities. The environmental taxonomy, which was supposed to be science based, has gone political, with nuclear and gas around the fringes. There is a long way to go in determining which social metrics and key performance indicators are appropriate and how to measure them, let alone bringing many countries into a taxonomy, which tends to be what the market looks at to develop a benchmark.

Nash: There is a massive demand for green bonds, which seems to be unsated. Then there are emerging markets, which are going to have a difficult transition so, need these funds. Not enough is being done to meet them in the middle. A lot of fund managers say emerging markets are too risky, but you can get fund structures where financial institutions or governments inject equity and then leverage it up by selling it to investors. So, you can provide cheap financing for emerging markets.

Freedman: Mechanisms like the IMF need to be involved as a backstop.

Nash: Some of these things are being done, but not on a big scale.

Lee: When it comes to ESG and climate, emerging markets are a challenge. When people talk about emissions, they point to the obvious countries that are the largest emitters, such as China building coal-fired power stations.

But China spends on average over 15 times more investing in renewable energy than we do. So, the idea of assessing a country as good or bad and putting a moral judgement on it is difficult. A country can be good and bad at the same time, in the same way hydrocarbon companies also invest in renewable energy. Guiding investors to make those decisions is challenging because they are not black and white.

What’s your outlook for the mainstream fixed income market?

Nash: Higher yields, flatter curves, wider credit spreads and a weaker dollar. This time around it is not just the US that looks good. Emerging markets tightened last year and now that inflation is relaxing they can ease off the gas a little. We could get outflows from the US to a number of emerging markets for the yields on offer.

Reedie: You could capture value from less duration-sensitive parts of the market and take more credit risk there. Nobody is predicting an imminent default cycle. Risk positions that benefit from good growth and corporate profitability are less reliant on spread levels being correct. We believe these are the safest places to be if you are constrained in fixed income and credit.

Nash: Markets did a bad job of pricing risk correctly during the quantitative easing years. Although it is a good economy, which is why the adjustments are occurring, will the default rate pick up because there is nowhere to hide?

Evans: Covenant advisers are extremely busy with restructurings. I wonder if this has been caused by banks thinking it was not worth calling in money from zombie companies while interest rates were low and changing their view now that rates are picking up. It is too early to tell.

Reedie: As financial conditions tighten, cracks will start to appear. Anything over-levered or exposed to the wrong part of the economy is going to be tricky. It does not feel like a systemic issue.

Freedman: Pricing power is always important, but even more so now with corporate margins coming under pressure. There has been de-leveraging through Covid and companies with too much debt could struggle. But I cannot see a material pick up in default rates.

You could argue that credit spreads are back to their 400-basis point long-term average, but they could widen further. Also, if the marginal buyer is not there for investment grade in Europe and we see outflows because of concerns over the European Central Bank becoming more hawkish, it will impact spreads.

Reedie: The tail risk is that it could become self-fulfilling. US investment grade’s total return is -5.5%. Once that gets in front of the holder who has always been long in fixed income and they start reading that this time it’s different, that could accelerate in a dis-orderly fashion. This is the market participant angst we talked about.

Clissold: Where do they go to hide? The S&P is down 10% and bonds 5%.

Reedie: Global aggregate bond ETFs, which are short duration, yield more than 2%. Those are potentially places you can hide.

Thomas: If you are moving out of high yield, you can go into emerging markets where valuations are attractive.

Freedman: Fixed income markets are quick to price in rate expectations. Normally it does not take long, if you have kept your powder dry, until you can reinvest in higher yielding bonds and wider spreads. We may not be far away from that, perhaps in the second half of this year. Because of geopolitics, if we get aggressive rate hikes they may ultimately take out rate expectations further down the line, and it would create some attractiveness on the shorter dated parts of the curve.

Nash: That’s what happened. Treasury yields have risen about 60 basis points this year and South African rates have fallen about 60 basis points. That is the macro story. Are emerging markets solid now because the US yield curve is flattening? The inflation story in the US means lower rates down the line, which will not fire up the economy. If rates are going to be lower, buy long-end local bonds. Is that the story, or is it a natural rotation from developed markets to emerging markets because the growth story is in place? I am not sure which one it is.

Thomas: It is also about flows in emerging markets. They have not seen the flows they experienced around 10 years ago since people reduced their exposure as the commodity cycle unwound. So, the flows have been a headwind for years. But the valuations are compelling, and growth is solid. If the recovery is sustainable and synchronised, then emerging markets are an interesting proposition.

Reedie: They are benefiting from their exposure to oil. On the flip side, geopolitics is getting more problematic. The bull case for emerging markets has been in place for a while and those who were bullish would have expected an acknowledgement of the challenges for China property from the authorities, which has not come. T

heir propensity to risk growth for longer than market participants thought they would in the interests of social stability was meaningful. The next trigger point was supposed to be post the Winter Olympics, but we are yet to see anything. That is a big part of the global economy, which is continuing to pursue a zero Covid strategy. There is a healthy dose of humility that comes with that. We have no idea what is going on in Putin’s mind and who, hand on heart, knows what is happening in the power channels of China?

Clissold: For me, China is a developed market.

Evans: The quality of information you get on Chinese stocks is more like a traditional emerging market. I agree that the underlying economy makes it a developed market, but can you trust what they are saying?

Freedman: Developed market rates will react to China’s growth. They need to back state-owned enterprises to help support the real estate sector, which is important for China’s citizens. It is hard to imagine that they will let too much more pain happen.

Nash: The trick to getting last year right was understanding that China slowed from March onwards. We never have the data and tend to see what is happening in pricing after the event. Last year China did too much in terms of reform and fiscal tightening. Everyone has this period wrong in terms of policymakers, but they really got it wrong with China. But they are reversing things and we are seeing that in the pricing. The data in Asia is looking better, currencies are picking up and you are seeing it in credit numbers. If they have turned, you have to take note.

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