The clouds are slowly clearing up as the number of new Covid-19 cases decline globally and governments maintain their focus on keeping stimulus in place. As a result, interest rates are on the move and we have already seen material moves both at the start of the year and in the last week in the US and Europe. The withering cushion of protection that carry offers in this environment is, by this point, becoming obvious and catching the attention of asset allocators.
The low yield and high duration currently on offer, in a market that is near decade tights from spread perspective, leads to material downside if the risk is not managed appropriately. As one would expect, not all markets are impacted equally. For example, global investment grade is down almost 1.5% year-to-date while global high yield is up 1.3%. This is a reflection of higher sensitivity to interest rates (as defined by higher duration) in the higher quality part of the market and how there is still upside to be found in some corners of the global high yield market. With global high yield at 6 bps from 1-year tights and global investment grade through 1-year tights, together with a lift-off in interest rates, means it will be harder to generate returns this year without heightened attention to security selection1 and a multi-asset, unconstrained approach to global fixed income markets2.
Source: Federated Hermes, Bloomberg. Past performance is not a guide to future performance.
