A Glimpse into the Fixed Income Market

Bonds have not effectively protected against losses in the recent market conditions where high inflation rates coincided with a rapid rise in interest rates. Despite this, bonds are still viewed as a defensive asset class as the returns from coupons and maturity values are long-term.

Fixed-income markets, except for inflation-linked bonds, have experienced a widening yield (resulting in price declines) due to inflation, interest rates, supply issues, and recession concerns Initially, interest rates led this move, with government and investment-grade bonds experiencing greater reductions than high-yield bonds This is because of their longer duration, which makes them more sensitive to rate hikes Recently, supply issues and recessionary fears have contributed to volatility across all markets.

The price decline in 2022 is attributed to the market pricing in duration risk (risk of rates increasing) and increased credit risk (risk of default). The current market prices better reflect risk premia due to changes in central bank stance and messaging, particularly from the Fed and BoE They have shifted from the "lower for longer" narrative to "rate hikes to combat inflationary pressures. " The rate hikes implemented by the central banks are considered a catch-up to the market's already priced-in rates

With the bond market facing its toughest period in 40 years, it's time to consider the potential for growth and the options available. Here are some key points to keep in mind:

The market is now showing signs of rebounding, with fund managers citing its current cheapness. Bond yields are becoming more attractive, with fund managers buying bonds under par and receiving coupon income and capital appreciation

Investment grade options are becoming more appealing, with higher quality yields

Access to diversified credit instruments and new issuance is possible through scale.

The present yields present an excellent opportunity for fresh capital investment.

While investing globally offers many advantages, it also comes with currency risks, as revenue generated in non-GBP currencies worldwide is exposed to exchange rate risk. A weaker sterling is generally favourable for UK investors since overseas revenues and profits can be exchanged for a greater amount of sterling, which is less expensive. However, since exchange rates are volatile in the short term, FX risk can introduce volatility to a portfolio

If lower Sterling is good for globally-minded GBP investors, then hedging against lower sterling (by reducing FX exposure) becomes less advantageous. As the Sterling has depreciated against several key currencies throughout 2022, the hedging program on the fixedinterest funds has detracted from returns.

Past performance is not indicative of future performance.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise You may get back less than the amount invested.