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Fixed Income Outlook 1Q 2022

Goldilocks & The Three Bulls or Bears?

Faced with a complex macro backdrop, central banks will be seeking to deliver “goldilocks” policy normalization to keep inflation in check and neither too hot nor too cold. The temperature of financial markets will depend on the balance between bearish and bullish factors. The bearish developments include an unwind of easy macro policies, high inflation and virus uncertainty. These factors are somewhat counterbalanced by positive economic and corporate earnings growth alongside healthy private sector balance sheets. The final bullish investment signal is structural in nature: an acceleration in private sector efforts to advance the climate transition which gives rise to long-term investment opportunities.

The global economy is also adapting to a new environment in China. Starting in 2020 with swift virus control, China entered its own macro orbit. Through 2021, while policy in advanced economies remained easy, Chinese policymakers normalized macro policies and tightened regulations in several sectors, most notably in the property sector. Overall, China is settling into a new regime where policymakers tolerate slower growth in the near term for a more resilient economy in the long run.

CIO Perspectives

Samuel Finkelstein

Chief Investment Officer, Fixed Income and Liquidity Solutions

Samuel Finkelstein


 

“We expect fine-tuning of policy settings to continue in 2022, stabilizing the China property sector, and in turn, supporting the Asia high yield market. We also believe 2021 reaffirmed the case for Chinese government bonds (CGBs), with yields insulated from coordinated moves in global yields. Attractive yields in a global context, diversification benefits and a tailwind from index inclusion support continued exposure to CGBs.”

Ashish Shah

Co-Head of Fixed Income and Liquidity Solutions, Goldman Sachs Asset Management

Ashish Shah


 

"Macro and corporate conditions are consistent with an early- to mid-cycle environment, however, an unwind of global liquidity and extended valuations creates a more challenging investment environment relative to the past two years. As a result, we are inclined to gravitate towards our strategic asset allocation model, with a preference for securitized credit, high yield corporate bonds and floating-rate assets such as bank loans."

Macro at a Glance

An in ease in transitory inflation drivers may give way to underlying price pressures

A demand rotation from goods to services (see chart) should allow supply bottlenecks to ease and there are tentative signs of moderating cost-push inflation. But even as so-called “transitory” drivers ease, inflation may remain underpinned by “underlying” price pressures such as firm inflation expectations and wage growth.

 

Source: Goldman Sachs Asset Management, Macrobond. As of November 2021.

Policy Picture

Rate lift-off and QE unwind will take hold

Policy rates in G10 economies have generally moved lower since mid-2019 but that is set to change in 2022 (see chart). At the same time, there will be a sizeable reduction in central bank bond buying as the Fed, ECB and BoE scale back purchases or the size of their balance sheet holdings.

 

Source: Bloomberg, Goldman Sachs Asset Management. As of January 6, 2022.  Central bank abbreviations: Bank of England (BoE), Bank of Japan (BoJ), European Central Bank (ECB), Reserve Bank of New Zealand (RBNZ), Bank of Canada (BoC).

What to Watch

The supply side of the economy

There are tentative signs of moderating cost-push inflation. For example, our Index of Global Supply Cost Pressures (see chart) eased month over month in recent readings.

 

Source: Macrobond, Goldman Sachs Asset Management. As of January 1, 2022. Our Index is based on more than a dozen indicators of global cost-push pressures including key commodity prices, supply-side components of PMI indices and inventory data.

Sustainability Spotlight

From Greenflation to Carbonomics  Low-carbon technologies are not yet fully incentivized due to the limited reach of global decarbonization policies and carbon pricing. We believe revenue-neutral carbon pricing is an efficient way to advance the climate transition.  At the same time, policy uncertainty is constraining capital allocation to hydrocarbons and high-carbon sectors, such as shipping. The result is underinvestment in key parts of the economy. The energy supply-demand mismatch is further compounded by the climate transition as the development of many clean technologies boosts demand for “old economy” commodities. 

 

From a macro perspective, this two-speed decarbonization effort suggests that commodities and high-carbon sectors may be an ongoing source of cost inflation—or “greenflation”—and inflation volatility for several years, before low-carbon technologies gain scale and become more economical.  Over the longer term, as “carbonomics” is realized, a reduced cost of low carbon activities and clean energy sources could be deflationary force, particularly if green technologies continue to benefit from economies of scale and innovation.

 

Advancing the climate transition  As a firm focused on climate transition, we see an opportunity for engagement and collaboration with clients on custom investment solutions that leverage our environmental, social and governance (ESG) analytics such as data on physical climate risks¹, transition climate risks and sector-level ESG templates. 

 

 

1 Our ESG framework was the first in the industry to leverage a dataset (produced by Four Twenty Seven) that matches physical climate risk exposure to the distribution of population, agricultural production and overall GDP creation within countries.

Disclosures

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.

Investment grade refers to the quality of a company's credit and to be considered investment grade issue, a company must be rated at 'BBB' or higher. Anything below this 'BBB' rating is considered non-investment grade or high yield.

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Date of first use: January 12, 2022.   264051-OTU-1534800

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