Two key bond market drivers offer hope
Nick Hayes, fixed income portfolio manager, Axa Investment Managers
Despite uncertainties in the macroeconomic environment, we see two key factors that could continue to drive strong bond market returns in the coming months and years.
First, valuations are much improved after the inflation shock of 2022. With the bulk of the interest rate hike cycle now behind us, fixed income valuations are starting to reflect a different part of the economic cycle where central banks are more supportive to bond returns.
Second, we also see a world where risk appetite is quite limited. Often this can turn into a positive technical, as the worst-case scenario, which many investors are positioned for, may not materialise and this becomes a positive tailwind for markets.
Credit standards will tighten further
Marie Antelme, economist, Coronation Fund Managers
Bank failures in the US and Europe have prompted a rise in volatility and reintroduced concerns about broader financial stability.
While swift moves to reassure investors and contain fallout ensued, credit standards, which were already tightening in the face of a maturing rate cycle, are expected to tighten further from here. The risk of other failures will be an ongoing consideration for central banks over the coming months.
This complicates the outlook for monetary policy as central bankers continue to fight stubbornly high inflation in increasingly financially fragile economies. It also raises the risk to developed-market growth into the second half of 2023, and central banks are going to find it difficult to navigate an appropriate policy path.