If 2018 was the year where quantitative tightening started to take hold, 2019 is the year it’s likely to strengthen its grip. After a decade where central banks flooded the markets with liquidity in order to stoke the economy, they began to reverse this pro- cess last year, looking to shrink their balance sheets and normalise interest rates after years of unconventional monetary policy.
This reversal process is however already having a profound effect on financial markets, as illustrated by the extent of negative asset class returns across the board in 2018. With signs of moderation in global growth, recession indicators are murmuring, and volatility has replaced an unusually long period of calm.
For credit investors, we are entering a new era of fragility where broader economic conditions are more likely to have a negative impact on credit spreads. There is a need to tread carefully, but if heeded, the stage is set in the year ahead for the nimble and well positioned investor to take advantage of the move from quantitative easing to quantitative tightening (QE to QT).
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