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Rising interest rates: what impact on bond markets?

Bond markets have corrected sharply in response to central banks’ rate hikes, but yields have also rebounded considerably. This means there are some new, much awaited investment opportunities, especially on the US and Swiss markets.

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Daniel Varela 04

Yields are rising at last

Like a tsunami, inflationary pressures have quickly engulfed the entire supply chain. This surge has been fuelled mainly by soaring energy prices, which, in addition to driving household heating and travel costs higher, are affecting the transport costs for all types of goods, ultimately pushing up consumer prices. Because of the war in Ukraine, energy prices look set to remain high. The war has also resulted in increased food prices, as Ukraine and Russia are both major grain and fertiliser producers.

After holding off, the main central banks took decisive action by quickening the pace of monetary tightening. Their goal is to slow their economies in order to rein in inflation and, above all, to prevent a self-reinforcing wage price spiral. Recent data suggests that, in the developed world, the rise in the cost of living has already peaked. Core inflation, which excludes energy and food, appears to be heading downwards in several countries, led by the US.

Bond markets have been rattled by renewed inflationary fears. This has led to investment opportunities in various markets. We think that the upswing in bond yields largely offsets the risk posed by inflation, particularly on US and Swiss bonds. We recommend increasing portfolio exposure to these two markets by investing in longer-dated bonds.

 

Are you interested in our analysis of economic and market news? Find our investment strategy for Q3 2022 here.

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