Podcast: Strategic Thinking Out Loud

May 2026

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Article Type
BondTalk
Topics
Credit, Rates, Politics, Macro, Long-Term Outlook
Published
May 08, 2026
Read time
6 mins
Author
Colin Finlayson, CFA
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In the latest edition of Strategic Thinking Out Loud, Colin Finlayson, Investment Manager, answers three questions that we've been hearing regularly from our clients. Firstly, which of the major central banks is most likely to hike rates. Secondly whether government bonds are still a good risk off hedge. And thirdly, why have corporate bonds held up so well in the recent market volatility. 

Transcript

 

Which of the major central banks is most likely to hike rates?


In terms of looking at the major central banks, we have heard from all three of them recently. So the European Central Bank (ECB), the Bank of England and the Federal Reserve (FED). And from what they've said, I think it's clear that the most likely to raise rates is the ECB and the least likely is the FED with the Bank of England somewhere in between. 


This is all to do with the differing impacts of inflation, on growth, on their economies, with Europe being more sensitive to that and the US less sensitive. Although the most recent FED meeting did have a much more hawkish tilt to it than many had expected. For the ECB and the Bank of England, the key issue will be for how long energy prices remain at these elevated levels, and the Bank of England included, quite helpfully, three different scenarios of the impact it would have on inflation, which in their more extreme scenario, saw our headline CPI reaching 6.2% at the start of 2027. 


Bank of England - Inflation Scenarios (%)

 


Source: Bank of England


That said, we still believe the ECB are the most likely to raise rates. They're facing all the same challenges from higher levels of energy prices. And because of their inflation mandate, we believe they will be the first ones to raise rates. And that may well come at their next meeting in June. 

 

Are government bonds still a good risk off hedge?


And the answer to that is actually it depends - it depends on the nature of the shock that we're that we're facing. So something like an inflation shock that we're going through right now or that we saw in twenty 2022, Government bonds are not a good hedge at all as they tend to underperform in those environments. You'd be better off actively managing your level of duration risk and reducing that or investing in more higher yielding assets. So more of a duration management rather than an asset allocation decision when we're considering government bonds at that time. 


But if what we're facing is more of a growth shock, so if we're entering a period of recession, then absolutely government bonds can perform. The starting yield (today) is more elevated, which gives them a greater potential to perform in that sort of scenario, although that's not something that we're anticipating in the near term. 


Another way that we could see a bit of volatility in markets could be on fiscal concerns and government bonds are really part of the problem when it comes to concerns about deficits and fiscal problems. Again, in that environment, they wouldn't necessarily offer you a huge amount of protection. So to answer the question, yes, they can offer a hedge, but it's much less effective than it may have been in the past and only worked well in certain market situations. So I'd be careful in terms of leaning too heavily on government bonds in times of stress. 

 

Why have corporate bonds held up so well in the recent market volatility?

 

The simple answer to that is around yield. Investors need yield, and the yield being paid on corporate bonds is viewed as attractive, and many investors are looking through any near-term uncertainty and looking at the longer term value that is offered from investing in corporate bonds. So quite simply, demand is outstripping supply. So even though credit spreads are tight, the all in yields are still attractive and enticing for investors to look at the to show as a measure of, you know, how strong that demand has been since the conflict in Iran kicked off at the beginning of March. We've seen some of the largest ever corporate bond issuance coming to the market. Huge deals coming from a lot of the hyperscalers and companies such as Meta, Google and Amazon. And these have been taken down easily by the market, which shows that there is demand there for good quality companies, particularly those with higher levels of yield. The yield that there often is important because that that is, is providing a cushion for investors to absorb some of the weakness that you might find. So what you find is if you invest in the high yield market or investment grade market, then spreads have to move quite materially wider before you lose any money. So investment grade, maybe one hundred basis points, high yield, maybe three hundred basis points. So there is a degree of cushion and a more of a defensive element to some of these high quality corporate bonds that are causing people to look at them, possibly instead of government bonds, as I'd already mentioned in the previous question. So demand is outstripping supply. And a lot of that has been driven by the high levels of yield, which is allowing large amounts of issuance to be well absorbed by investors. 


So hopefully that helps explain some of what some of the key questions that investors have been facing. And both my sort of macro side and more sort of bottom up corporate bond perspective, what it does tell you is that active management and more flexibility in terms of how you're investing is important because there are risks out there, but they are not outweighing the opportunities that we still see within fixed income markets. 

 

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Author

Colin Finlayson, CFA
Portfolio Manager
Colin Finlayson, portfolio manager, is a member of the global rates and multi-sector portfolio management teams.
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