After an unpredictable year in the fixed income markets, Alexander Pelteshki, Investment Manager at Aegon Asset Management, highlights his expectations for 2022.
After an unpredictable 2021, Alexander Pelteshki co-manager of the Aegon Strategic Bond Fund and Aegon Strategic Global Bond Fund believes that, in many ways, we find ourselves in the same situation at the start of 2022, optimistic about growth and hopeful that Covid-19 will soon be behind us for good. As a result, government bond markets are selling off once again.
However, he notes that there are a few differences this time around with labour shortages ubiquitous, energy prices at risk of having settled higher and global growth likely to come off (from a high base) but continue to remain above trend.
“Our base case for the start of 2022 is that the well-flagged withdrawal of monetary stimulus from the central banks will have a broadly negative impact on fixed income markets. Within that, the volatility of returns will be much higher than experienced in 2021, which should leave plenty of room for alpha generation” says Pelteshki. “We start the year with a relatively low level of interest rate risk, in line with our expectation for a gradual move higher in rates. We see room for higher yields both in the US as well as in the UK, while Europe always has an opportunity to surprise.”
Pelteshki anticipates that the “main government bond market yields will continue to trend higher from here. Labour and input unit shortages will continue to be a theme, which would likely keep pressure on unit prices and wages. As a result, financial conditions are likely to tighten and government bond yields to re-set higher”. He believes that trying to navigate, on the one hand, a good growth picture still yet, on the other hand, a very challenging macro and technical backdrop could prove the biggest challenge for all fixed income investors this year.
Pelteshki foresees better opportunities in the lower quality part of the credit markets. “Both total returns and excess returns are likely to be decent for the year, despite some elevated intra-year volatility. The excess spread that these bonds offer would provide a much bigger cushion against rising rates versus the investment grade bond universe. The supply picture is much cleaner too and the default risk for most sectors continues to be relatively low due to the broader economic strength.” Pelteshki argues that this makes low duration, high subordination High Yield bonds a good place to take risks.