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Global Fixed Income Strategy Monthly Report

August 8, 2024
Invesco
2022 in review paul jackson

In our regularly updated macroeconomic analysis, we offer an outlook for interest rates and currencies – and look at which fixed income assets are favoured across a range of market environments. 

Global Fixed Income Strategy Monthly Report

In this edition we discuss:

  • Macro
    The European macro-outlook is brighter now that the post-pandemic energy shock is in the rear-view mirror. We expect the European Central Bank (ECB) to look through some of the recent volatility in inflation and cut rates twice before the end of the year.
  • Credit
    With rate cuts likely on the horizon in the US, there is now an increased focus on US growth dynamics. We speak with Invesco Fixed Income portfolio managers about this shift’s implications for the investment grade market and their strategy for navigating the second half of the year.
  • Interest rate outlook
    We are positive on European rates. While inflation is above the ECB’s comfort zone, it is converging to its 2% target. We believe the ECB will need to cut more aggressively than the market currently prices for 2025, as inflation cools, and growth remains subpar. We are positive on UK rates as well, where disinflation appears on track. At the start of August, the UK announced a reduction in interest rates from 5.25% to 5%.
  • Currency outlook
    We are negative on the euro given our expectation that the ECB will cut rates sharply over the next 12 months in response to falling inflation and a weak growth outlook. Likewise, we are negative on the British pound as we approach the likely start of the Bank of England rate cutting cycle, which could undermine the pound’s attractiveness as a relative high yielding currency.
  • A Q&A on the case for high yield in a moderating environment
    “Moderate” is an ideal word to describe a beneficial macro backdrop for credit, and especially high yield. Niklas Nordenfelt, Head of High Yield, explains why he thinks today’s environment of moderating inflation and moderate growth set high yield up to perform well in the coming months.
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Catch up on the last few editions:

FAQs

Whether you’re looking for income, diversification, capital preservation or total returns, our global fixed income teams have the strategies, the scale and the flexibility needed to match your objectives as markets evolve.

We have more than 200 fixed income specialists who invest across regions, investment styles and capital structures. Their expertise spans the entire fixed income spectrum, covering credit, rates and currencies.

  • $313.72 billion in fixed income assets under management
  • 45+ years investing in fixed income markets

Source: Invesco as of 31 December 2022.

Fixed income investments can offer several important benefits to investors:

  • Diversification: Adding fixed income securities to a portfolio can help diversify it and reduce its overall risk, as bonds typically behave differently to other investment instruments like equities.
  • Risk reduction: Fixed income investments are deemed less risky than stocks, as the issuer is contractually obliged to meet the income payments and repay the principal sum on the redemption date. In the event of bankruptcy, fixed income instruments also sit higher up the capital structure than equities. This means that the issuer will meet its debt obligations before looking after its shareholders.    
  • Liquidity: Many fixed income securities are highly liquid and can be easily bought and sold in the market.

While fixed income securities are deemed less risky than equities, there are still some key things to look out for:

  • Interest rate risk: When interest rates go up, bond prices go down. This is because, in the new higher rate environment, new bonds will be issued on more attractive terms. As such, investors looking to sell their existing bonds will need to do so at a discount in order to compete.
  • Inflation risk: When investors buy a bond, they commit to tying their money up for a set period of time. If inflation is high or rises during the lifetime of the loan, its value will be eroded and their money will have less purchasing power when it is repaid on the redemption date. Inflation also erodes the purchasing power of the income earned.
  • Credit risk: When you invest in a business or government, there is always a risk that they will go bankrupt and fail to repay the loan. Furthermore, if they run into difficulties, they may struggle to meet interest payments and default on their obligations. Fixed income investors should carry out thorough credit analysis before buying a bond to make sure the issuer is financially sound.
  • Market risk: If an investor is unable to hold a bond until maturity and needs to sell it on the secondary market, price fluctuations resulting from the overall performance of financial markets could lead to losses.

Related insights

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. 

Important information

  • This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.

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