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Is the bond bear market here to stay?

Investment managers and analysts must take account of a range of potential threats and opportunities facing global markets in 2022. Here Paul Brain, head of fixed income at Newton Investment Management outlines his thoughts on the prospects facing global fixed income markets in the year ahead.

What is the most important event/data or threat you will be watching in 2022?

“We believe there are several important threats/events facing fixed income investors in 2022. Key among these will be developments relating to inflation and the removal of monetary stimulus by the central banks.

We expect these concerns will be influenced by the government bond markets until the second quarter of next year. From that point on, we would expect to see a more stable safe-haven yield environment. One other counter trend that could develop is the idea that rising costs across multiple areas will slow economic growth and start to bring an end to the bear market in bonds that we have seen more recently.

Rising labour and raw material costs, rising interest rates and costs associated with climate change could also become a significant burden and undermine corporate profits and therefore economic growth. We would expect this to be a feature from the second quarter of next year onwards.

By way of illustration of the points on central bank activity and the wider economic outlook, the bond ‘clock’ below highlights some of the key trends we expect to see in both the year ahead and beyond and the likely impact of these broader trends on fixed income markets as the market cycle evolves.

Source: Newton Investment Management as at end September 2021. For illustrative purposes only.

Beyond these key concerns for 2022, the growing focus on Responsible Investment could also increasingly influence fixed income markets. Both bond markets and global fixed income investors should be able to play a valuable role in our global transition away from carbon dependent industries and assets.

Issuers are increasingly aligning their strategies more closely with sustainability objectives and taking more care to ensure they address Environmental. Social and Governance (ESG) factors properly. While some investors commonly assume only equity holders can exert real influence over the companies they invest in, fixed income investors could also make a real difference in influencing corporate behaviour."

For Professional Clients only. Any views and opinions are those of the investment manager unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.

For further information visit the BNY Mellon Investment Management website.

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