January 2022: Double Punishment for Fixed Income Markets

Chart of the week

January was characterized by a rise in risk-free rates and a rise in spreads (excess returns offered by riskier securities). These movements led to a downturn in the bond markets: when rates rise, the value of securities falls. The chart below shows the evolution of the 5-year German sovereign yields (risk-free rate) as well as the evolution of credit spreads on several market segments: Investment Grade (low-risk borrowers), High Yield (riskier borrowers) and AT1 (subordinated debt of the banking sector).

 

OUR ANALYSIS

The rise in rates and spreads is linked to a shift in expectations regarding central bank policies. Since the last quarter of 2021, investors have been anticipating a faster-than-expected rise in Fed rates in the United States. Very recently, expectations have also shifted in Europe, with a halt to quantitative easing and a first rate hike by the ECB possibly taking place before the end of the year.

It should be noted that this rate hike was less negative for investors who opted for low-duration* securities, and was even beneficial for investors with negative duration*. It should also be noted that with rates now higher, fixed income markets are once again more attractive to all investors thanks to a higher carry.

See also:

*Low duration: bonds with short maturities. Negative duration: investment strategy offering an inverse sensitivity to the rates risk.

***

The opinion expressed above is dated February 11, 2022 and is subject to change.

*Sources : Bloomberg and calculation from Lazard Frères Gestion

As of : February 11, 2022

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