Global Bonds—Volatility & Uncertainty Here to Stay

In brief

  • Uncertainty isn’t in short supply — Macro uncertainty and market volatility are expected to prevail for some time due to the ongoing Russia-Ukraine conflict, China’s zero-COVID policy and growth trajectory, tighter monetary policy in response to high inflation prints and re-emerging financial fragility.
  • Dislocation breeds opportunity — Active management is designed to take advantage of volatility and dispersion in the markets. The higher levels of starting yields and spreads offer the potential to generate long-term returns, especially in the context of a global fixed income mandate. It is imperative to maintain a strong focus on risk management.
  • Anchored in fundamental views — As active investors, we aim to look through the noise and focus on the fundamental, valuation and technical factors supporting an investment thesis and then determine our conviction versus the consensus that’s priced into the market. Security selection is paramount.

Two words come to mind when describing the fixed income markets at present: volatility and uncertainty. Numerous macro factors have coalesced to create the current macro and market environment. These include the legacy of COVID, war in Ukraine, high inflation, rapidly tightening monetary policy and a strong dollar. Markets have reacted to this confluence of uncertainties with heightened volatility and significant selloffs.

Macro uncertainty abounds

The factors mentioned have led to numerous questions centered around global growth, elevated inflation and policy expectations. The uncertainty is comprised of a few key components, increasingly reflected in the volatility indicators we follow. For one, in the post-COVID world we have come to doubt the validity of some of the data collected over the last couple of years, which has cast doubt on the comparability of the data. The uncertainty regarding the data is also reflective of the fact that we have witnessed distorted transitions from goods to services as economies came out of lockdowns at a different pace.