Central banks' concern about inflation and subsequent monetary policy tightening is likely to be extremely negative for higher risk bonds, according to Paul Grainger, head of global multi-sector fixed income at Schroders.
He said the levels of growth and of inflation in the economy have been much greater than many expected, but Grainger expected both to have peaked in 2021.
He particularly expects growth to slow in 2022 as a result of weakness in the Chinese economy.
Grainger noted that while stimulative policies in China helped to drag the global economy out of the Global Financial Crisis in 2009, policy priorities in that country have changed, so while there will likely be stimulus, it will not be enough to have a material impact on global GDP. However, Grainger still believed global growth will be above its own long run average in 2022.
In terms of what that meant for government bonds, he said the slowing growth meant government bond yields were unlikely to rise massively.
In normal circumstances, a moderate rise in government bond yields would be positive for higher risk corporate bonds.
But he said that with central banks now taking the view that they needed to act against higher inflation, this was likely to be negative for higher risk corporate bonds.
This was because slower GDP growth reduced the capacity for those sorts of companies to earn more money, while higher rates increased their borrowing costs.
He said: “The outlook for riskier assets such as credit is less attractive than it was in 2021. This is also in line with our views that central banks are becoming more attentive to global inflation risks and we are past peak growth for this cycle.
"It is too soon to turn outright negative on these assets, certainly without a much sharper slowdown in economic growth than is our base case scenario. We do, however, think the macro environment moving much more clearly into mid-cycle dynamics is less supportive for overall “beta”. Instead, more emphasis will be placed on aspects such as sector rotation within this asset class. Greater volatility caused by central banks and bond markets should seep into riskier asset classes, in our view, providing plenty of opportunity but also demanding patience.”
david.thorpe@ft.com
