investment viewpoints

    Alphorum: transition states in fixed income

    Alphorum: transition states in fixed income
    Yannik Zufferey, PhD - Chief Investment Officer, Fixed Income

    Yannik Zufferey, PhD

    Chief Investment Officer, Fixed Income
    LOIM Fixed Income team -

    LOIM Fixed Income team

    Welcome to Alphorum, our quarterly collation of alpha-seeking views from the LOIM global fixed-income team. In this launch issue, we focus on two prevalent themes: the outlook for US growth and inflation, and how credit investors can accelerate in the race to net zero. 

     

    US exceptionalism

    The diverging growth trajectories of the United States and Europe is becoming clear. In the US, amid a resurgent economy and massive fiscal stimulus plans, the Federal Reserve is taking a patient approach with monetary policy by accommodating inflationary signals and increased public-debt issuance. In contrast, the European Central Bank is more concerned about inflation and public debt as the bloc’s economy struggles to recover from the pandemic.

    Fiscal support, Fed dovishness and economic reopening has spurred inflation risk to stage a comeback in the US. We expect rates volatility, which rose above the historical average in Q2, to remain elevated as investors continue to assess how the rollout of US fiscal stimulus will impact inflation.

    Markets currently expect the Fed to raise the benchmark interest rate in 2022 but the accuracy of this timing is uncertain given the slack in the labour market and the Fed’s emphasis on accommodating growth. We do see upwards pressure on interest rates but perceive managing the risk of rates volatility as a more immediate concern than judging when the next increase will occur.

     

    Net zero: the race is on

    The focus on decarbonisation in the policy, social and corporate spheres is making 2021 a pivotal for year for the transition to a net-zero economy. Efforts to achieve the goals of the Paris Agreement will impact every sector in the global economy and hugely influence sources of risk and opportunity in fixed-income markets.

    In our view, it is essential to identify companies whose emissions trajectories are aligning towards a net-zero future – particularly current heavy emitters in critical sectors, such as steel or cement, whose transformation will accelerate the green transition. We call these businesses ‘ice cubes’ and they are instrumental to our net-zero fixed-income approach.

     

    Market perspectives

    We also provide our views of the risks and opportunities in major fixed-income markets worldwide, from sovereign bonds to high-yield credit, and perspectives on integrating sustainability. Read our overview of each market below, or download the full issue of Alphorum.

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