Here’s how the bond market will go in 2002
The 2022 macroeconomic scenario and government bonds. Analysis by Adrian Hilton, Head of Rates and Global Currencies, Alasdair Ross, Head of Investment Grade Credit, EMEA, and Roman Gaiser, Head of High Yield, EMEA, Columbia Threadneedle Investments
2021 will go down in history due to the excessive use of the adjective "transitory". Speaking of the markets, it refers to the battle between rising inflation expectations and the idea that the currently inordinate level of price increase will adjust next year, as soon as we leave behind a series of transitory factors, such as the reopening of the economy, shortages on the supply side (in terms of labor and capital) and rising energy prices. As a result, it was a difficult year for core country government bonds. For most of the year there was an increase in expectations regarding yields and inflation, in the face of actually negative results.
At the same time, central banks remained accommodative, but failed to gain market confidence or support on several occasions. Our belief in an environment of growth, inflation and lower bond yields for longer has also been called into question, making this year a somewhat more difficult time for our funds.
What are the prospects? We believe this kind of exceptional inflationary pressures will not be repeatable and will not lead to sustainable wage increases. In light of this, we believe that after this year's solid rebound, economies will be burdened by negative real wage developments, fiscal difficulties (especially in the UK) and some monetary tightening. Government bond markets should benefit from this environment, which is why our central forecast is for higher yields in 2022 than in 2021.
Our view is that the long-term structural drivers of low inflation and low bond yields will remain in place and that neutral interest rates will not prove higher than in previous periods. Therefore, we believe that the market's failure to steepen yield curves, even when inflation rises, is reasonable. In addition, we increasingly favor the 3-5 year curve segment, where rate pricing seems full and carry attractive. Even as the ECB is scaling back its continued support for Eurozone bond markets, we think it will remain sensitive to the risk of fragmentation among sovereign issuers and resist undue widening of peripheral spreads. This makes us comfortable in owning Italian and Spanish bonds.
Investment Grade – Alasdair Ross, Head of Investment Grade Credit, EMEA at Columbia Threadneedle Investments
For investment grade credit markets, 2021 will be remembered as a year of low spread volatility, in stark contrast to the previous 12 months. Global IG spreads moved within a range of around 20bps from January 2021 to mid-November 2021, while in 2020 we saw a much wider range of over 240bps. This extremely low level of volatility and dispersion translates into greater difficulties for active management and while a large proportion of our funds have outperformed this year, the magnitude of outperformance is less than last year.
What are the prospects for the coming year? We have a rather neutral view on the level of spreads, which reflects the balance between positive fundamentals and onerous valuations. Specifically, while policy conditions appear to be slowly converging in the 'wrong direction', current low and / or negative interest rates and projected future levels will continue to provide a favorable environment for the market. Second, the global economy may experience a modest slowdown, but for investment grade credit, a low but positive growth scenario (“neither too hot, not too cold”) would be ideal.
Such a scenario would create a useful climate to curb excessive exuberance on company boards, while averting the risk of glaring downgrades or worse. Corporate credit quality is also heading in the right direction and we expect key indicators to return to end-of-2019 levels by the end of this year. Finally, we still expect a return in demand for income-generating asset classes with lower risk levels, such as IG credit, all at a time of low new issuance and continued purchases by central banks in Europe.
High yield – Roman Gaiser, High Yield Manager, EMEA, Columbia Threadneedle Investments
For the European high yield credit markets, 2021 will be remembered for the improvement in credit quality, witnessed by both the return of the rising stars and the collapse of default expectations below 1%. This appears in stark contrast to 2020, when market volumes and credit quality grew due to the number and type of issuers entering the European high yield universe, while the "fallen angels" and default expectations they reached almost double-digit levels.
European high yield spreads have traveled back and forth on a 100bps spread over the past 12 months, hitting lows in mid-September. Credit spreads returned to pre-Covid levels, helped by improved corporate fundamentals and positive ratings developments. This translated into lower expectations of default as central banks continued to support the “lower for longer” principle, providing good support for the asset class.
What awaits us next year? European high yield continues to be supported by positive growth prospects and improving corporate fundamentals. The increase in Covid-19 cases, as well as the recent developments related to the Omicron variant, serve as a warning not to forget about the risk. However, efforts to avoid lockdowns and support the improving economic environment remain a key focus for most governments.
Market technical factors seem balanced: inflation fears related to supply and labor shortages, as well as disruptions to supply chains, have put pressure on government bond yield curves, not to mention that central banks they are starting to detach themselves from accommodative monetary policies.
However, the appetite for higher income and higher yielding assets remains high and new issuers entering the market offer a number of opportunities. With spreads almost 100bps higher than their 2021 lows and now back to the levels seen 12 months ago, valuations appear fair despite the recent rise in uncertainties. Expectations of a continued post-pandemic economic recovery seem obvious, while worries about defaults have fallen to all-time lows. With risk premia near historic lows, some fear that compensation for unexpected volatility will be limited. Nonetheless, with yields picking up and a moderate duration, the European high yield universe offers a number of opportunities.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/come-andra-il-mercato-dei-bond-nel-2002/ on Sat, 01 Jan 2022 07:01:04 +0000.