The supply side disruptions and commodity inflation from previous months continued, carried over by the ongoing power struggle between East and West over Ukraine. Furthermore, the Federal Reserve (the Fed.) added its contribution to this unsettled situation. Through an increasingly aggressive policy narrative, the Fed. is now looking to dampen down US aggregate demand in its effort to address domestic inflation. American interest rates were raised by +0.25%, as a first step towards more ‘normalized’ financial conditions.
Meanwhile, the Eurodollar system (Dollars exchanged outside of the US) continued to show signs of liquidity stress; its yield curve remained inverted and countries, such as Sri Lanka, braced themselves for default on their foreign debt.
If the Fixed Income world remains unsettled, one should remind investors this market is a massive investment space. Under current conditions, some bond instruments will fare better than others. For the subordinated asset class, this situation brings with it interesting investment opportunities not seen since 2018 and 2016.
As we mentioned in our previous report, our defensive positioning rolled out in February is progressively being redeployed. Our investment focus remains on large systemic quality issuers, as these corporations should be able to ‘weather today’s storms’. We are also looking increase the carried yield return (now edging towards 7%), while maintaining a reinvestment option for a more aggressive positioning once present day uncertainties dissipate.