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A changing climate in fixed income: 360°, Q1 2021

What is our current view of fixed income markets? And where do we see the best relative value? In our latest edition of 360°, Andrew ‘Jacko’ Jackson, Head of Fixed Income, Mitch Reznick, CFA, Head of Research and Sustainable Fixed Income, and their team of specialist investors consider the areas that have the potential to deliver superior risk-adjusted returns.

After a year of tumult, can the silver lining be green?

A global, public health crisis; social inequality and unrest; record economic retraction and violent swings in financial markets. To say that 2020 was a very challenging year might be the mother of all understatements. The primary driver for the turbulence in fixed-income markets was, to state the obvious, the Covid-19 pandemic and its associated effects on society and the economy. As credit investors, typically we would have some miserable, lugubrious take on such market events. Although there certainly will be a reversion to that base-case disposition sometime in the future, we actually see a silver lining in all of this.

If nothing else, the Covid-19 pandemic exposed the importance of addressing environmental and social challenges. Within investments, “sustainability” came under the spotlight, drawing attention from all corners of the capital markets. Indeed, 2020 was a record fundraising year for sustainable investment funds, with global net assets reaching close to $1.6tn. It was also a record year for green and sustainability-themed bonds and loans with issuance of $700bn for an 80% jump year-on-year, with substantial growth coming out of the US. For these reasons, we decided to take a thematic approach to this edition of 360°, viewing each section through the lens of sustainable investing.

Spotlight on sustainability: issues in focus this quarter

In this issue of 360°, we also take a closer look at three areas:

  • Climate-focused solutions: how can we tackle climate goals in credit portfolios?
  • Valuations and technical: the rise of green bonds
  • Sustainable fixed income: there is no going back on the green transition

See below for a flavour of these sections or read the full report for a more comprehensive picture.

Rates curves steepened during the period as the market began to price-in rising inflation amid expectations that the US economy could overheat on account of the fiscal package and progress made on the roll-out of the vaccine. Against this backdrop, the US 10-year treasury yield moved from 0.91% to 1.74% during the quarter, although there was little impact on spreads.

The structured credit market (in terms of both ABS and CLOs) posted a positive first quarter with spreads tightening across tranches in most parts of the market. During the turbulence of 2020, one thing has become very clear: structured credit has delivered. Structures have done what they were designed to do and investors were appropriately protected from credit deterioration.

The strong correlation between ESG factors and CDS persisted during the high market volatility of 2020, suggesting that the market’s ability to differentiate between (and price in) low ESG quality and high ESG quality is creating real opportunities for investors.

Fixed Income Quarterly Report

Q1 2021
 

Archive: previous editions of 360°

As fixed income markets have moved through the economic cycle, our thinking has also developed – take a look at some of our previous reports to see how the investment landscape has changed over the past year.

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A test of endurance: 360°, Q3 2021
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