Having successfully dampened volatility across all asset classes through the multi-year implementation of near zero interest rates, liquidity injections and QE of various forms, the major global central banks now appear to be diverging in their policy stances.
- The major central banks are approaching a crossroads, with policy set to diverge for the first time since the global financial crisis. The scale and pace of this policy divergence is likely to have an impact on the level and shapes of global yield curves, the major currency exchange rates and the level of market volatility.
- The volatility of corporate bond spreads may approach their pre-crisis trends while government bond volatility could increase; investment-grade corporates’ risk premium should more closely reflect underlying fundamentals in the future, and the uncertainty of exiting unconventional monetary easing and divergent policies could result in higher levels of volatility for bond investors.
- Against this backdrop, we believe that a manager’s ability to deploy macro strategies in bond portfolios (alongside a fundamental value-driven allocation to selected risk assets and rigorous research-based bottom-up issue selection) will be the key to navigating this volatility, generating alpha and controlling overall portfolio risk.
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