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

Weekly Credit Insight

Chart of the week: the elephant(s) in the room

Last week, we discussed the first risk we anticipate for next year: the potential shift in corporate behaviour on the back of funding rates at record lows. This week, we consider the risk that a taper tantrum could emerge in 2021.  

Central banks have played a greater role in influencing valuations this year through their direct purchases. As a result, they have removed a significant amount of risk premia from markets – and not just the ones they are directly involved in.

Investors have become used to lower volatility – and achieving less of a premium – within the investment-grade market, which has been skewed by central-bank activity. Because of this, they have been willing to take on more risk in other parts of the market.

This resulted in a near-record amount of negative-yielding assets globally, record low yields across credit markets and a global high-yield cash price at a five-year high (see figure 1).

Figure 1. The global high-yield cash price shoots up

Source: ICE Bond Indices, as at December 2020.

As markets return to normality in 2021, central banks will have no option but to consider scaling back their programmes. With the market laser-focused on any hint that central banks are contemplating a withdrawal, volatility is all but unavoidable.

Switching on the monetary taps is easy and feels good for everyone involved, but a withdrawal of this helping hand can be just as painful. Sadly, it is also necessary evil. As a result, investors should think carefully about their fixed-income allocations and consider how a truly global and unconstrained approach could help them achieve their goals.  

More Insights

EOS publishes white paper Fixing Fast Fashion
This paper sets out how companies can move towards circular economy approaches.
Authenticity in ESG integration
We explain why the delivery of Sustainable Wealth Creation has and always will be our core purpose.
Global Equity ESG: Annual Report 2020
Combining attractive fundamentals and good or improving ESG characteristics
Weekly Credit Insight
Dispersion in year-to-date returns across various parts of the global credit universe.
Zen and the art of investment management
Exploring mindfulness as a vehicle for truly responsible investing
Fiorino: bond themes and late-cycle mood music: as rates go up-tempo, markets rotate
As global economies emerge from the Covid-19 doldrums, bond markets could be tiring. But late-stage fixed income dynamics can also play out well for astute investors. Fiorino conducts a brief enquiry.