Head of Fixed Income Strategy
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.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
