Higher rates, tighter credit, and less liquidity matter

Higher rates, tighter credit, and less liquidity matter

lewthwaite-brett

Brett Lewthwaite

The Fixed Income Strategic Forum

One of the challenges with investment management is balancing the short-term noise of financial markets with a longer-term assessment of the investment and economic landscape. The Fixed Income Strategic Forum is held three times a year, comprising more than 130 investment professionals, and operates to establish our medium-term views and strategic portfolio positions.

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Key takeaways from the latest forum

Maybe it's different this time?

Maybe it's different this time?

We believe contributors to market resilience, including fiscal support, artificial intelligence (AI)-led equities, and quantitative easing (QE), seem poised to fade, as does "maybe it'll be different."

Brace for impact

Brace for impact

The long and variable lags of significant monetary, credit, and liquidity tightening are converging. It's only a matter of time.

QT - the straw that broke the (bond)vmarket's back?

QT - the straw that broke the (bond) market's back?

With the US Federal Reserve implementing quantitative tightening (QT) again, bond markets are asking "who will buy bonds now?" The market is disconnecting from fundamentals.

Higher for longer? Well, until something breaks

Higher for longer? Well, until something breaks?

"Higher for longer," in such an indebted system, is not celebratory. The longer rates stay higher, the more inevitable financial market dislocation.


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Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Liquidity risk is the possibility that securities cannot be readily sold within seven days at approximately the price at which a fund has valued them.

Quantitative easing (QE) is a form of monetary policy in which a central bank, like the US Federal Reserve, purchases securities from the open market to reduce interest rates and increase the money supply.

Quantitative tightening (QT) refers to when central banks raise the federal funds rate. In a tightening monetary policy environment, a reduction in the money supply is a factor that can significantly help to slow or keep the domestic currency from inflation.

Recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in gross domestic product (GDP) in two successive quarters.

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