This has been a really tough year for investors. We expect periodic sell-offs in equities, or high yield debt, for example, but usually enjoy the benefits of diversification in “safe haven” assets. A period like this where everything sells off – government bonds, equities, etc – is unusual and particularly painful. Almost nothing has worked this year except commodities.


Markets have been freaking out about higher inflation and increasing pressure on central banks to aggressively tighten policy, slowing growth and risking recession to stamp out inflation. That environment has been painful for most fixed income strategies, including ours.


Coming into 2022, our view was that inflation numbers would start to roll over in the first half of the year. However, Russia’s invasion of Ukraine exacerbated price rises for key commodities, with knock-on effects up the value chain into utility bills, food, and consumer goods of many kinds. That’s delayed the inflation rollover and caused an unexpected hike in yields.


Perhaps counter-intuitively, though, we believe the current spike can only lead to a sharper reversal in yields further down the line.

Slower growth means lower inflation
At the time of writing US inflation has just hit the highest level since 1981, but a number of leading indicators are pointing to a sharp economic slowdown that will drive inflation lower.

Recession risks have risen sharply this year and in our view are well over 50% for the global economy. The pressure on the consumer across the globe from higher energy and food prices has driven US consumer confidence to the lowest point since records began in 1978. Real wages have been declining in real terms for over a year. US 30-year mortgage rates have jumped to levels we haven’t seen since 2006.1

At the same time, financial conditions have already tightened materially: the dollar is stronger, money supply has dropped sharply, central banks have been hiking rates across the globe (nearly 200 rate hikes globally since February 2021), fiscal policy is tighter, and the Federal Reserve continues to sound very hawkish.

As we move through the rest of this year and into 2023, we expect the slowdown to accelerate, and inflation to roll over because inflation can’t be sustained without growth. Even in the stagflation of the 1970s, growth slowdowns caused inflation and yields to collapse. That will eventually cause a pivot in central bank policy to slow the rate of tightening, leading to lower yields and a recovery in fixed income assets.
The inflation rollover is delayed, not cancelled
Despite the surprise jump in May’s inflation print, we are already seeing clear signs that inflation is decelerating. The continued strength of inflation has been driven by energy prices, which continued to rise in May. Stripping out fuel and food inflation, the data strongly suggests that “core” inflation has already peaked.

Back in 2020, the first signs that the global economy was reawakening from the pandemic were found in commodity markets, the leading indicators of reflation. Today, prices in agriculture, lumber, copper, among others are starting to roll over.

Energy inflation remains unpredictable given the war in eastern Europe. That said, given oil has already risen by nearly 60% so far this year, the contribution of energy to inflation is likely to moderate. Given the supply chain problems that drove much of higher inflation are naturally working themselves out (see for example queues at US ports), and the economic slowdown, inflation will start to decline, potentially steeply. It’s worth highlighting how the inflation picture can change dramatically in a short space of time. In the middle of 2008, in the build up to the global financial crisis, inflation was running at nearly 6%, yet by July of 2009 deflation had duly arrived.
Economic slowdown will put brakes on inflation … and rates
So, far from the doom and gloom being espoused by some commentators, we’re more inclined to see this as a remarkable opportunity to invest in fixed income, the likes of which hasn’t been seen since after the global financial crisis.

May’s surprise inflation print drove another selloff in government bonds, with the US 10-Year reaching a level we haven’t seen since 2011. Built into market pricing at the time of writing are expectations of almost 3% of rate hikes by February next year, and a base rate over 4% in 2023.2

Given the impermanence of inflation, the scale of the economic slowdown that is clearly on the horizon today, and with the impact of Fed tapering still to hit markets, we continue to believe that the markets have overreacted. The Fed has been working hard to convey the impression that it will hike aggressively – which in itself helps tighten policy – and have high conviction these hikes won’t be achieved. At these levels, this makes developed market duration a very attractive proposition.
Duration looks attractive now, credit…not yet
We remain relatively conservative in our credit allocations, because even with the volatility we have seen so far this year we don’t think that elevated recession risks have been fully priced by credit spreads. Our strategy is biased towards conservative sectors, short maturity bonds, and special situations that can be resilient in an economic shock. The short maturity bias also gives us plenty of liquidity as those bonds mature, meaning we have “dry powder” to add to risk as recession risks become more fully priced, and credit starts to look attractive. We are preparing for a recessionary environment in credit markets, where active managers who can pick the companies that can survive and prosper tend to deliver most value to investors.
1 Source, Bloomberg, 14/6/22.
2 Source, Bloomberg, 14/6/22

The value of active minds: independent thinking


A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Important Information

This document is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK. 29177 *In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong).and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore.