5 Key Themes for 2022
As each year draws to a close, it’s common for investment managers and banks to publish predictions for the year-ahead. In fixed income, these notes tend to be heavily focused on the macroeconomic and central bank policy forecasts that drive yield predictions. Forecasting is a tough gig. Even seasoned market professionals have a patchy record in accurately predicting key variables like growth, inflation, and the level of bond yields.
At Ardea Investment Management, macro forecasting is not part of our investment process because we adopt a pure relative value investment approach that aims to be independent of the level of bond yields, the direction of interest rates and the macroeconomic factors that dominate the performance of conventional investments. Therefore, instead of the traditional year-ahead forecasts, in this note we highlight 5 key themes that will impact the risk/reward balance for fixed income in 2022: 1) high expectations and risks to global growth; 2) peak inflation; 3) peak QE and bond supply/demand dynamics; 4) rate hikes to further un-anchor yield curves; 5) cross-market rates divergence and volatility.
A common link among these broader market themes is the rising level of macro uncertainty (as also outlined in a recent note on central bank policy tightening). For relative value, this uncertainty is likely to manifest in further distortions in yield curve shapes, interest rate volatility and changes in the relationship between bond and interest rate derivative curves.