Five things we’re thinking about

It’s a really interesting time to talk about bonds.

So much has happened in the last few months, both in terms of the economy and market valuations. Looking at 2020 as a whole, all areas of the bond universe performed quite strongly. However, things have been a lot more mixed in recent months. Investors are currently trying to assess how well we will emerge from the pandemic, and what the mix of economic growth and government stimulus we are now seeing will mean for the capital markets in the years to come.

Here are a few of the topics that we are busy thinking about:

• In the last few months, economic data, from activity indicators and GDP numbers to employment growth and retail sales, has strengthened very significantly. But the major central banks are firmly in accommodative mode. Is there a risk that inflation rises faster, undermining bond market valuations? Yield curves have already steepened. What’s the appropriate level of interest rate risk?
• Major central banks have made their commitment to very low interest rates plain. They continue to purchase securities to support the bond markets and have said that they will tolerate some pick-up in inflation. But at some point, they will have to signal that they are at least beginning to look at slowing or removing the extraordinary levels of support they have been giving since the Covid-19 crisis began. How will the market react to that?
• Monetary and fiscal support, along with economic recovery, have created a benign environment for credit. Right across the corporate bond market, returns have been strong. Now yields and spreads are at low levels by historical standards. How much further can the market rally and what areas and bonds offer the best income opportunities now?
• The speed of the recovery from last year’s sell-off has meant a lower level of defaults than we’ve seen in other recessions. Some commentators are predicting that defaults may already have peaked for this cycle. But credit risk remains the primary concern for bond investors like us. How can we best balance returns with capital risk?
• Interest in ESG investment factors has grown very rapidly and both bond issuers and regulators have responded. How do we take account of these factors in our job as investors and what sort of opportunities are offered by green bonds?

If you want to know more and are based in the UK, Channel Islands or Isle of Man, we’re holding a webinar covering the above topics on 25 May 2021. Join our conversation and register your interest here.