Active interest rate risk management will be critical in the wake of rising inflation and central bank tightening.
Eurozone bond markets
Marie-Anne Allier, Manager at Carmignac
- This beginning of the year is marked by the continuation of the strong upward trend in interest rates that began in mid-December. More generally, this rise is in line with market dynamics which, over the last 6 months, anticipate a cycle of generalized and particularly rapid monetary normalization in the wake of inflation forecasts which continue to surprise on the upside, driving up significant yields, especially on the short end.
- In Europe, the ECB joined other central banks in developed countries in their desire to normalize their key rates, despite limited wage pressures, keeping a maximum of options and letting the market price in an exit by the ECB from negative rates this year.
- The end of the ECB’s asset purchases should have a negative effect for the most indebted countries, combined with a robust issuance calendar in the first quarter, which should put their spreads under pressure.
“We have moved from an environment of unlimited quantitative easing and ‘low for longer’ a year ago to one of rapidly and broadly raising interest rates. In this environment, active interest rate risk management will be essential in the wake of rising inflation and central bank tightening. The supply and demand environment following the ECB purchases will be less favorable going forward. In Europe, we anticipate positive net issuance following ECB purchases (QE) this year for the first time since 2015, which means the ECB will not absorb all net supply in 2022. This might affect spreads of the most indebted countries.
Credit
Pierre Verlé, Credit Manager
- For the time being, credit markets are concerned regarding rising rates, and might subsequently worry regarding the normalization (upward) of default rates, which have been kept at artificially low levels for two years. As always, opportunities arise when investors are fearful.
- Despite the recent widening, credit market spreads remain relatively tight. In this environment, we continue to focus on idiosyncratic investment situations and maintain a conservative positioning with a high level of hedging, which allows us to reduce market risk while focusing on the alpha of our specific situations. .
- To cope with this changing outlook for more restrictive monetary policies, our allocation is focused on variable rate instruments, high yield bonds and issuers benefiting from inflation, which allows us to take advantage of a risk of limited duration.
“In recent history, the performance of credit funds has been influenced by beta, but this is an anomaly, as credit instruments are contractual and allow investors to focus on fundamentals rather than expectations. We build performance by estimating risk and selecting instruments, not by guessing the direction of a market. Concerns are sources of opportunity, provided that one is ready to analyze more complex (and not more risky) situations”.
