Senior Fixed Income Strategist
Summary: Looking ahead to the new year, we have asked the Saxo Strats what they will be looking at in the new year. In this article, our Fixed income Strategist, Althea Spinozzi, takes the temperature on a bond market that’s been cold for years.
2022 will be all about bonds. We will see interest rates rising, provoking an increase in market volatility. While dropping yields have supported the economy and assets valuations for years, rising yields will threaten weaker companies and growth.
Despite the turmoil in markets, central banks will not have a choice other than to tighten the economy to slow down price pressures. Aggressive monetary policies will put upward pressure on the front part of the yield curve. In contrast, long-term yields will remain compressed as the economy decelerates. Therefore, the US yield curve will bear-flatten throughout the year. Yet, it’s real yields investors should pay attention to. As the Federal Reserve adjusts its tightening path, inflation expectations will adjust lower while nominal yields will move higher, accelerating the rise in real yields.
The only way to find shelter from high inflation and rising interest rates is to look at yield above the expected inflation rate while minimizing duration exposure. Only junk bond space can offer a solution to the problem. However, at this moment, it is critical to cherry-pick credits under a buy-to-hold perspective not to incur a capital loss. Don’t worry, though! Although higher rates will be distressing for risky assets, more exciting opportunities will emerge.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
