Rethinking fixed income investing when the easy money is coming to an end
The end of easy money may point to different investment scenarios
Core fixed income allocation, usually comprising high-quality government and corporate bonds, has played a relevant role in diversified portfolios over the last few decades. In a 30-year bull market for bonds, this allocation has been a stable source of performance; it has, for a long time, provided attractive income and helped to limit the overall portfolio drawdowns. Investors now stand at a crossroads: changes in CB monetary stances are resulting in the end of the easy money era driven by excess market liquidity. While fixed income allocation remains key to diversifying overall risk exposure in a balanced portfolio, especially at a time of rising market volatility, we believe it is time for investors to rethink their investment approaches in order to deal with the possible scenarios ahead.
In a stronger growth environment, our base case is for a gradual rise in interest rates, which is healthy at this stage. We see at least two further Fed rate hikes in 2018, with the possibility of seeing more with pressure building on inflation. The European Central Bank, while keeping a more accommodative stance, will wind down the Public Sector Purchase Programme (PSPP) in 4Q18. The Bank of Japan will likely lift the 10Y target, proportional to the global yields level, and the unwinding of the negative interest rate policy could follow very closely. The Bank of England appears likely to raise rates once in 2018, as a consequence of higher inflation. This means that the peak of liquidity is behind us.
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