JP’s Journal: A 2024 reprise

It has certainly been an eventful year with political and economic developments to the forefront. Time for some reflections on this but also on how the RLAM Fixed Income team is evolving to face new challenges.

Looking at 10-year US treasury yields, there has been a rise of 50bps so far this year. It is simple to explain why – the US economy has been stronger than expected and interest rate expectations have shifted as a result. My own view was that the US would expand but that it would be weak growth. Robust government spending and resilient consumer spending on the back of low unemployment and supportive wealth effects have played a part. But the dynamism of the US, its entrepreneurial tendencies, and the ability to harness innovation have once again confounded the sceptics.

This cannot be said of Europe. Growth has been subdued – although better than my thinking of 12 months ago. This, in itself, talks to the low expectations for the region. The German powerhouse is struggling to cope with changes in global trade patterns and the shift in energy pricing. France has been handicapped by political instability – partly a reflection of a natural unwillingness of the electorate to face up to some stark choices. The UK changed government but there has been no discernible change in direction. The economy is flat lining, debt levels are projected to remain high and service inflation remains a worry.

The economic problems of Europe have not prevented a rise in yields. Looking at the German 10-year rate  we can see that yields are up 25bps year to date. In France, the shift higher has been a bit greater, at 30bps, but this represents only a modest widening over Germany given the political headlock the country faces. Conversely, the UK has been the loser, seeing 10-year rates up 70bps. In part this is due to the very low level of yields at the end of 2023 (when yields fell sharply in December to end at around 3.5%) but it does indicate a relative loss of confidence – bad news when debt levels are high and rising.

Credit has been a relative winner – sterling investment grade returns have been positive, reflecting the shift down in credit spreads. We see the same in high yield, where spreads are tighter and doomsayers are licking wounds. It will not always be so straightforward and there is now a sense that a lot of good news, from a credit perspective, is captured in valuations. So, some caution is now justified. But in my opinion, even at present levels spreads, high grade sterling bonds still offer compensation for default risk, when viewed from a medium term perspective. My view reminds that in the longer term investors get paid for taking credit risk.

there is now a sense that a lot of good news, from a credit perspective, is captured in valuations

In relation to the RLAM Fixed Income team it has been a year of evolution. Will Nicoll has now taken over as Head of the team, bringing in a private asset capability to complement our existing strengths in asset backed bonds. We have expanded our global credit capabilities, taken big steps towards the launch of our first CLO, grown our Sustainable credit franchise and demonstrated the virtues of active government bond management. A year of change and progress.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.