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What the ‘next normal’ means for fixed income: reimagining core bonds
Keiyo Hanamura
April 10, 2023
After three years of COVID, roller-coaster economies, inflation and central banks’ frantic fight against an uncertain future, it appears we may finally return to the world we used to know. The “new normal” – where rates are low, volatility subdued, and investors are willing to take on more risk – could yet return. But can it be so simple? After all the upheaval, are we really returning to the pre-COVID era?
We could be entering a new regime, where inflation is expected to be higher and central banks may be more reluctant to ease. As a result, fixed income may continue to see the return of yields, even in the safest assets. With a higher level of yields and a more balanced Fed/ healthy economic cycle, the largest bond allocation might finally fulfil its traditional roles, of producing income and offering diversification from equities. This is the “normal” investment director Keiyo Hanamura believes we will eventually arrive at. But, in the short to medium term, we are in the midst of a transition period as we allow rate hikes to work through the system.
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