Search this website. You can use fund codes to locate specific funds

Weekly Credit Insight

Chart of the week: the withering cushion

Risks in the current environment are plentiful: in previous weeks we’ve discussed the probability of a rise in unfavourable corporate behaviour, as well as the chance a taper tantrum might emerge. This week, we focus on inflation.

The reach-for-yield environment means that the cushion offered by the coupons is dwindling. A significant part of long-term returns within fixed income comes from the coupon, or the so-called carry component.

By dividing yield by duration – this is a measure of the sensitivity of a debt instrument to a change in interest rates – we can calculate the ‘cushion’ that the yield currently offers against a market widening. Figure 1 plots that relationship for the Barclays Global Aggregate index over the last 20 years.

Figure 1. The yield cushion

Source: Federated Hermes, Bloomberg LP, as at December 2020.

Given that duration is at record highs and yield is near all-time lows, the breakeven is also at an all-time low of just 12bps. This high sensitivity to rates will be dangerous if inflation expectations increase and government bonds consequently move higher.

In the end, inflation could help us manage the debt pile the world has accumulated. How should we navigate this market characterised by higher volatility and a withering cushion from carry? Find out in our recent Delta podcast.

 

More Insights

No time like now: why investors are moving on ESG
We take a trip down memory lane and into the future with ESG...
Can palm oil ever be considered sustainable?
With monocropping one of the main causes of deforestation, palm oil production needs to change. Rather than staging a boycott, responsible investors should engage with companies across the supply chain to encourage the adoption of globally recognised certification standards
Leading the way in climate-related engagement: Federated Hermes achieves A+ score in InfluenceMap study
Federated Hermes ranks among the top five firms in a study focusing on the climate-related engagement efforts of the world’s 30 largest asset management groups.
Weekly Credit Insight
A Lift-off in rates focuses attention on security selection and an unconstrained approach
A changing climate in fixed income: 360°, Q1 2021
In a sustainability-focused edition of 360°, we explore how sustainable finance shifted from a niche corner of the market to a position of prominence.
Credit Pulse: market update - 12 February 2021
What are our views on fixed income markets for the next coming months? How does the team prepare for the different possible outcomes?