Fixed income markets were stable in January and February and responded well to the nomination of Kevin Warsh as US Federal Reserve chair.
The US/Israeli attacks on Iran created volatility across global bond markets, as concerns mounted about the impact of higher oil prices on inflation.
We believe the crisis is unlikely to impact the ability of portfolio companies to repay their bonds.
At a glance: After a stable start to the year, the war in the Middle East has created vulnerability in some global bond markets, with investors worried about the impact of higher oil prices on economic growth.
Fixed income markets were stable in January and February. The US Federal Reserve (Fed) kept interest rates on hold, as expected, but the market continued to anticipate interest rate cuts in the latter part of the year. The nomination of Kevin Warsh as Fed Chair was seen as a “safe” choice, likely to keep US monetary policy on a sensible path.
In the UK, gilt yields moved significantly lower, a combination of easing inflationary pressures and some relief that the November budget contained few nasty surprises. In Europe, a lack of inflationary pressures and central banks keeping interest rates on hold helped support bond markets. The corporate bond market also remained steady, with yields high.
The US/Israeli attacks on Iran created swings in prices in parts of the bond market as global investors started to worry about the impact of higher oil prices on inflation. Changing expectations for interest rates caused significant price movements in government bond markets, while corporate bond prices also started to rise in a more difficult economic environment.
For the most part, it does not change the fundamental outlook for the bonds we hold. If high oil prices persist, it may raise costs for some companies. However, we focus on stable companies with strong balance sheets and reliable business models. We do not believe higher energy costs will compromise their ability to repay obligations to bondholders.
A long term perspective is important. Having a well-diversified global portfolio, while being careful and selective on the quality of the underlying bonds, is vital in trying to minimise risk in a turbulent environment and building a reliable income stream. We are also careful to manage interest rate exposure, meaning investors should not be significantly exposed to shifts in interest rate expectations.
The trust is already cautiously positioned, with higher weightings in higher quality corporate bonds. This is not because we foresaw any of the current crisis, but simply that in many cases we were not being sufficiently compensated for the risks in lower quality corporate bonds (these may be companies with more debt or a weak growth outlook). This is designed as a resilient core fixed income allocation and we recognise that our investors rely on the strategy for its predictability of income and capital stability.
For today’s investor, rapid change and market ups and downs are par for the course. Therefore, any investment that might deliver a degree of certainty is an attractive proposition. For those seeking a stable income, the Invesco Bond Income Plus (BIPS) can offer precisely this.
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