Macquarie Fixed Income Strategic Forum

Macquarie Fixed Income Strategic Forum

Read the CIO note

The bigger they are, the harder the fall

Central banks – The gloves are off

Central banks – The gloves are off

Central banks are undertaking the most aggressive tightening cycle in decades, coupled with quantitative tightening.

Lifting the lid on inflation – Blow by blow

Lifting the lid on inflation – Blow by blow

Analyzing drivers and base effects suggests inflation is likely to moderate this year but further shocks cannot be discounted.

Economic growth – On  the ropes?

Economic growth – On the ropes?

Current landscape is a stagflation environment, which based on history is usually followed by lower growth, and by association, recessions.

Soft or hard landing – Points decision or going down for the count?

Soft or hard landing – Points decision or going down for the count?

Should central banks continue their hiking path, a hard landing is likely unavoidable: “The bigger they are, the harder the fall.”

Knowing where we’re going begins with remembering where we’ve been

Knowing where we’re going begins with remembering where we’ve been

There is a genuine limit to how much financial conditions can tighten given the elevated global indebtedness.

Simply put, the global economy and financial markets are facing massive tightening of monetary policy and financial conditions, fittingly described by a common boxing adage, 'The bigger they are, the harder the fall,' and based on our analysis, the more this is going to hurt..."

Brett Lewthwaite

Brett Lewthwaite

  • Global Head of Fixed Income, CIO

This podcast was recorded 28th September 2022

  • Listen to the full podcast (36:59)
  • Central banks – The gloves are off (8:49)
  • Lifting the lid on inflation – Blow by blow (5:03)
  • Economic growth – On the ropes? (6:28)
  • Soft or hard landing? (6:31)
  • Implications for portfolio positioning (7:25)

Asset class viewpoints and our strategy

  • Significant market uncertainty regarding inflation amid poor trading liquidity suggests that bond yields will continue to be volatile over the shorter term.
  • Monetary policy operates with long and variable lags and while some of this has already impacted the leading economic indicators, the impact of the tightening cycle will likely be more apparent in early 2023.
  • While acknowledging the presence of short-term volatility, we believe bond yields have risen considerably, offering an attractive entry point and strong protection levels. Structural drivers that have kept rates low in recent decades also still exist. For long-term investors, duration is offering an increasingly attractive opportunity and we will seek to add in portfolios as appropriate.
  • In terms of regional preference, we continue to take opportunities to add duration where we believe markets have aggressively priced policy moves, e.g. Australia, New Zealand, South Korea and Canada.
  • Credit fundamentals remain strong in both the investment grade and high yield markets, though we foresee increased headwinds and weakening fundamentals ahead.
  • Industry and issuer impacts will be varied with most acute risks to industries in those most exposed to consumer demand and interest rates.
  • Credit valuations are not fully pricing in recession scenario. However, all in yields and dollar prices matter and provide support. Against this backdrop, we believe defensive positioning within credit is appropriate with a preference for highly-rated investment grade credit in favourable sectors.
  • Within high yield and bank loans, we feel that a disciplined and cautious approach is warranted with a higher-quality bias within portfolios, focusing on compensation for fundamental risk.
  • Emerging market (EM) sovereign fundamentals are mixed amid inflationary pressure, though most countries have some financing flexibility.
  • Corporate sector metrics peaked earlier this year with a move towards more neutral/negative outlooks, though with idiosyncrasy across industries.
  • We are cautious on EM foreign exchange (FX) exposure as US dollar strength continues to be the key driver though recognise valuations are attractive.
  • We maintain the risk-controlled approach within our EM strategies with very selective exposures, for example, favouring energy exporters, avoiding food importers and high-dollar-price high yield.
  • Fundamentals are stable overall in the structured security market, but facing slower growth.
  • Agency mortgage backed securities (MBS): Spike in rate market volatility leading MBS spreads materially wider – recommend reduction in underweight given spreads are near post-financial crisis widths.
  • Mortgage credit: Delinquency and losses remain historically low, with inflation pressures impacting non-prime borrowers. Selective opportunities in the sector.
  • Commercial MBS (CMBS): Rising rates will pressure valuations. Prefer selective participation in higher-quality segment. Collateralized loan obligation AAA-rated: Fundamentals are stable though liquidity is an issue. Rising rates and relatively attractive spreads should support demand for floating rate securities.
  • Australian residential MBS RMBS: Expect spreads to be broadly stable. Watchful for unemployment as a risk indicator while selective participating at attractive valuation levels.
  • The USD has continued to appreciate off the back of higher federal funds rate and pricing of further rate hikes. While the US dollar appears overvalued, we believe further upside remains likely over the short term.
  • Underlying weakness in global growth would be positive for the US dollar and may extend its strength over the medium term as investors seek safe havens.
  • Other currency moves have largely been driven by US dollar strength, though we would note further downside to euro and Australian dollar is likely given the potential for divergence between the Reserve Bank of Australia, the ECB, and the Fed, alongside higher recessionary risk in the European Union (EU).
  • The Japanese yen remains tied to the Bank of Japan yield curve control policy with occasional currency intervention, but could present an attractive hedge at lower levels.

Previous Strategic Forum insights

One of the challenges with investment management is balancing the short term noise of financial markets with a longer term assessment of the investment and economic landscape. The Macquarie Fixed Income Strategic Forum is held three times a year, comprising over 130 investment professionals, and operates to establish our medium term views and strategic portfolio positions. Check out our previous Strategic Forum insights below.

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