A series of bear market catalysts punctuated 2022 – from ongoing supply chain issues to Russia’s invasion of Ukraine, political instability in parts of Europe, rising inflation and higher interest rates. While the economic environment would prescribe taking a step back to crouch and observe as the cycle plays through, government bond and credit valuations tell a different story, writes Gaurav Chatley, a Senior Portfolio Manager for European Credit at M&G Investments.
While the various bear market catalysts have Fixed income markets have repriced to reflect the new environment Fixed income markets have repriced to reflect the new environment contributed to significantly wider credit spreads, this has occurred at a slower velocity and across a narrower range of sectors than the preceding Covid-19 market shock. This slow evolution of market weakness relative to the pandemic has also bred investor uncertainty, with investors equally slow to add risk, even as we approached Covid levels of credit spreads.
Amid a tricky economic backdrop with uniformly poor growth forecasts, central banks are focused on higher rates in order to tame inflation and help set a direction of travel. Meanwhile, consumer economies are struggling with a lack of demand as rising food and energy prices increase the cost of living and constrain consumer wallets and balance sheets.
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