Capital Ideas^TM

After the global financial crisis (GFC) in 2008, investors reduced their allocation to bonds, and broadly remained underweight the asset class for more than a decade. In 2022, the long period of accommodative central bank policy came to an end as inflation accelerated.

The return of and persistence of inflation has raised the challenge for central banks seeking to balance price and financial stability. The bar for central banks to intervene when the economy slows, and financial markets fall is now much higher.

Central banks massively expanded their balance sheets during the 2010s and COVID era, as they sought to stimulate their economies and halt deflationary pressures. Today, they are reversing this process and reducing their balance sheets through quantitative tightening (QT). The withdrawal of such large purchasers of bonds from the market removes an important factor that has helped suppress yields since the GFC.

These changes represent a normalisation of policy away from the extraordinary period of central bank intervention and financial repression of the 2010s and early 2020s. We anticipate therefore that this new regime is here to stay and unlikely to revert for the foreseeable future. In this environment the defensive attributes of conventional fixed income mean the asset class is potentially well placed to meet investors’ defensive needs.

In this paper, we share why we believe in the value of fixed income in portfolios, and how bonds should be viewed in this different world.