Aiming for perfect harmony
The fixed-income world faces a confusing cacophony of challenges. Striking the right keys at the right time is crucial to avoid discord. This calls for handing over the baton to the expert.
Generating alpha is all about hitting the right keys
The fixed income market is currently facing a hubbub of issues. Historically low yields, inflation worries, ultra-tight credit spreads, fears of stimulus unwinding, liquidity premium, concerns of a haphazard recovery and the emergence of new variants of coronavirus are just some of them.
The attempts by central banks to contain the effects of the upheaval caused by the coronavirus pandemic since early 2020 have depressed yields further. Indeed, the market value of negative yielding debt, both sovereign and corporate, almost equals the size of China’s GDP*. In the credit market, spreads have tightened significantly, resulting in elevated valuations.
Everyone is trying to second guess the trajectory of inflation and how soon policy makers will begin to tighten interest rates. It’s well known that policy makers have tried to rekindle inflation since the financial crisis more than a decade ago, with little success. In that world of falling yields and low volatility, economic outcomes were poor, as central bank liquidity flowed directly into financial assets.
But now governments have joined hands with central banks in efforts to boost growth and inflation, giving some heft to the initiative. The rapid vaccination rate achieved in major economic regions of the world has instilled some optimism about recovery. At the same time, supply bottlenecks and labour shortages are creating concerns on the inflation front.
It’s a confusing picture. Even US Federal Reserve officials have been giving off mixed signals. The key question is whether the uptick is transitory, or sticky. Any indication of imminent tightening by central banks or withdrawal of stimulus by governments could bring back memories of the famed `taper tantrum’ of 2013. Indeed, some would argue that the post-pandemic scenario is a perfect recipe for heightened volatility. Liquidity, or the ability to freely trade assets, may become a casualty.
To exploit this complex environment and preserve harmony, management of assets through the transition needs to be just right. That calls for specialised skill, deep experience, and developed expertise. A proven track record of generating alpha amid low yields and increased volatility is crucial. Whether you are seeking to generate income in the face of low yields, are concerned about liquidity in parts of the bond market, are nervous about the potential for a spike in inflation, or simply want to outsource your key fixed income asset allocation decisions, at Jupiter, we believe we have what it takes to address these key concerns. We call this human advantage ‘the value of active minds.’
*The total market value of negative-yielding debt worldwide was US$14.6 trillion as at 17 September 2021, according to Bloomberg. The size of China’s GDP at the end of 2020 was $14.7 trillion, according to World Bank data.