Coronavirus pandemic caused surging inflation, rising rates, and flattening yield curves, making the post-pandemic world a challenging era for bond investors. They need to continually differentiate between securities, sectors, and regions to survive in the current environment. While most firms are attuned to centralized markets and equities, fixed income assets require an all-different approach. Since the market has become highly concentrated over the last few months, it is now more susceptible to collusive behavior from primary dealers and banks than before. A firm mitigates any front-running risks and related penalties with the below-mentioned strategies.
Below, we will help you understand the complex landscape of fixed income research and provide some effective management strategies.
The Flattening Yield Curves in the Post-Pandemic World
After the pandemic, as economies started reopening, the repressed demand graph generated a robust global growth. Consequently, developed markets grew at a faster rate than in the pre-pandemic period. Such growth is expected to continue for a couple of years ahead as momentum carries forward. Considering the elevated inflation rates, central bankers across the world have pivoted towards tighter policies. However, pivots are not uniform, inflation severity and policy stances are different among countries.
As the post-pandemic world progresses and things come back to normal, tighter policies may slow down the global growth. Climbing rates and slowed down growth are the perfect ingredients for a flattening yield curve.
Five Fixed Income Research Management Strategies
Here are the top five effective strategies to manage fixed income research in the post-pandemic world:
- Cheer Credit Exposure: In the post-pandemic world, investors should optimistically look at rising rates since they are expected to perform well in the hiking cycles. Corporate and consumer balance sheets stay strong, which create resilience in the corporate issuers. A majority of companies worldwide are going through a phase of expansion and recovery, where acquisitions and mergers are the most significant risks rather than defaults and downgrades.
- Consider High-Yielding Sectors: Another effective fixed income research strategy would be to consider varying high-yielding sectors. These include CRTs with low correlations to each other and to government bonds. These bonds have floating rates with backup from homes and other tangible assets. As a result, they often benefit as a result of inflation. The robust housing market in the present age makes these fundamentals attractive for credit risk-transfer securities or CRTs.
- Differentiate Among Sectors: For investors, it is crucial to differentiate among various sectors since the sudden growth in the global market does not affect all the assets uniformly. Some sectors perform sooner than others in the current scenario. For instance, emerging market debt in local currency has the most negligible expected returns among the fixed income sectors in the near future. However, they are a good choice for a later period when the EMD hiking cycle will start running. At present, corporate and sovereign bonds and other hard currency EMDs seem to be more appealing.
- Get Tactical: As far as duration and interest rates are concerned, the present age is the right time to get tactical. The best technique is to trim the sail at times of lower yields and lengthen it when they start rising. However, do not shorten your exposure to duration drastically. Cash strategy for fixed income research will lag inflation and bonds. Although increasing bond yields are painful for the short term due to falling prices, they are excellent for investors in the long run. They will benefit more when coupon payments receive re-investments at higher, newer rates.
- Prepare for the Move: It’s time to look outside the domestic market for opportunity and diversification. The fast-evolving landscape in the post-pandemic world is suitable for a multi-sector global approach. Investors must monitor the conditions closely and prepare to move their portfolios according to the current valuations. An effective strategy would be to pair interest-rate-sensitive assets and government bonds with high-growth credit assets.
These strategies can help asset managers handle the interplay between credit risks and rates and make better decisions in the post-pandemic world. Rebalancing assets will help generate income and ROI while reducing drawdowns. The post-pandemic period brings several challenges. However, with thoughtful strategy and adjustments, bond managers and investors can prepare for inflation, handle uncertainties, and keep their portfolios in a better position for growth.
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