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Investment insights from Capital Group

Fixed Income
Fixed Income Perspectives

Quarterly macro and market insights from Capital Group’s fixed income team

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The statements expressed represent perspectives from Capital Fixed Income Investors, as at 30 June 2022. The views of individual portfolio managers and analysts may differ. © 2022 Capital Group. All rights reserved. Data as at 30 June 2022, and attributed to Capital Group / Bloomberg Index Services Ltd, unless otherwise stated.

Global economic outlook dampens as challenges mount

  • Stubbornly high inflation is forcing global central banks to take more decisive action, posing a headwind for growth
  • Markets are underappreciating the time it may take for inflation to reach the US Federal Reserve (Fed)’s target range
  • While our risk appetite is cautious in this environment, idiosyncratic opportunities remain as valuations cheapen

The combination of persistently high inflation, aggressive central banks and tightening financial conditions is weighing on financial markets and global growth outlooks. While valuations across many sectors look compelling after the market sell-off this year, we are exercising caution given greater uncertainty and elevated recession risk.

Inflation’s staying power is proving to be a global phenomenon. Countries across developed markets are in the throes of multi-decade highs in inflation rates, far exceeding central bank targets. In the US, the drivers of higher inflation have expanded beyond COVID-affected sectors, with acceleration in some areas. This underpins our view that markets are underappreciating the time it may take for inflation to normalise. The UK is contending with 40-year highs in inflation rates that are above 9%, pressuring cost-of-living for households. Similar trends of unrelenting inflation are also occurring in the eurozone, with wage pressures rising given higher costs and low unemployment. The Russia-Ukraine war has also pushed energy prices higher.

Persistently high inflation has disrupted growth momentum

high inflation

EU: European Union. Source: Refinitiv Datastream

Central bankers are aggressively responding to inflationary pressures. The US Fed raised rates by 50 basis points (bps) in May before following with a 75 bps move in June, marking one of the most aggressive starts to a hiking cycle since 1994. Rising inflation expectations raised concerns among Fed officials that high inflation may become entrenched and this thinking contributed to the massive rate increase in June. Developed market central banks have begun or have indicated upcoming hiking cycles as well, to combat the speed of price gains. We expect the Fed to continue on its path given its heightened focus on inflation, even as concerns mount for a slowdown in global growth.

The US economy is showing signs of waning growth momentum. First-quarter gross domestic product (GDP) shrank at a 1.6% annualised pace as a sizeable trade deficit slashed growth figures.1 Even so, high energy and food costs have hurt consumer sentiment. Manufacturing metrics have indicated a softening in business activity and soaring mortgage rates have cooled housing markets. While economic fundamentals remain solid, momentum is slowing and tighter monetary policy is likely to weaken demand.

Fed on most aggressive hiking path since 1994

Fed hiking

As at 30 June 2022. Source: Bloomberg

1. Source: Business Standard


Risk factors you should consider before investing:
  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.