Global Fixed Income Mid-Year 2022 Outlook

Global Fixed Income Mid-Year 2022 Outlook

We expect the second half of 2022 to present the same macro headwinds that posed a challenge in the first half: inflation, aggressive central bank action, growth concerns and wavering sentiment. Broadly, the pace and aggressiveness at which central banks have chosen to exercise their inflation-targeting abilities have surprised the market, and yields have risen accordingly. We believe this trend will broadly continue as central banks look to temper inflation, given they may need to increase their hawkishness further if the Russia-Ukraine war continues, commodity prices remain elevated and supply chains stay dislocated. Against this backdrop, our base case calls for a recession in the second half of next year to the first half of 2024.


More granularly, the European Central Bank (ECB) appears to have put itself in a tough position, whereby tighter monetary policy is required to combat higher inflation. This could, however, also lead to a fragmentation in eurozone yields and higher interest rates for periphery countries that already face high debt burdens. The Bank of England (BoE) faces the same inflation challenges but are also concerned about the tightness of the UK labor market. Over the longer term, it expects weakness in the UK economy as a result of the reduction of the real income levels and the effect that will have on the consumer side of the economy. The US Federal Reserve (Fed) has a monumental task in front of it: to traverse a policy tightrope whereby it will aim to balance raising fed funds and reduce its balance sheet (QT) enough to help cool inflation while not tipping the economy into a recession.


Given this precarious position and other previously-listed contributing factors, we believe rate and spread uncertainty and volatility will remain elevated within fixed income over the next six months until more clarity starts to emerge on the economic picture. With these cross currents, we are selective in how we are taking risk, focusing on robust structures and/or credits with a path to improvement. As a result, we believe favorable security selection will be rewarded. We continue to work closely with our global research teams to uncover risk-adjusted return opportunities.




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Aegon AM US

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