- There has been a significant drawdown in fixed income assets (down about 6%) for Quarter 1, 2022. Reasons for this is the surge in inflation and the contributory effect of the war in Ukraine which created a risk shock with high levels of volatility.
- The last 6 months we have seen a broad-based increase of inflation. Drivers – labour, goods and services supply shortage
- Why is inflation bad for Fixed Income? Most bonds pay a fixed coupon, inflation erodes this over time. We are also seeing a capital repricing of markets driven by Central Banks hiking rates to control inflation.
- Australia’s economy has had strong growth due to the recent commodity boom, higher prices, and the flow back to our economy has been beneficial as well as a tight labour market.
- Vulnerabilities to our economy are the large levels of household debt and elevated levels of house prices.
- Risk is if the RBA tightens too much, it could slow down the housing market and broader economy.
- Recap – Inflation has been a primary driver of the repricing of bond yields. Credit spreads have been moving wider due to Central Bank liquidity withdrawal and priced in recession risk. Secondary to all these factors is the recent geopolitical shock with the war in Ukraine.
Author – Schroders