Article
Fixed Income investors see light at the end of the tunnel
Financial markets eagerly look beyond the recession. Yet Fixed Income Investors worry about default rates or liquidity. What does the future hold?
December 30, 2022

Article
Financial markets eagerly look beyond the recession. Yet Fixed Income Investors worry about default rates or liquidity. What does the future hold?
December 30, 2022
We are deeply skeptical about the financial markets’ desire to “see past” the recession and view the world as if it were moving into the sunlit uplands. After many years of central banks implementing the unprecedented and coordinated Zero Interest- Rate Policy (ZIRP) alongside endless rounds of Quantitative Easing (QE), the “come down” feels both painful and protracted. As Fixed Income investors, we are worried about default rates, liquidity, and the loosening of credit terms and leverage over the past few years. We also acknowledge that certain aspects of our Fixed Income universe have further downside risk.
We do, however, believe that Fixed Income, more broadly, and the least risky parts, in particular, present outstanding value for risk for investors both in relative and absolute terms. In fact, we would go as far as to say that as we turn the page on the worst year ever for global Investment Grade Fixed Income and go into another year, there is the chance that 2023 will end up being the best year since 2009 for this particular sub-asset class.
This is the first in a series of short updates on Fixed Income markets written by the Credit Suisse Asset Management Fixed Income team. They will be concise, easy to read, focused on Fixed Income, and timely. Most importantly, these updates will express definitive views on Fixed Income markets. I also promise to give you my views through the lens of risk. To that end, I will kick off with my concerns over the short-term path for some of the higher risk parts of our asset class.
We note with interest that both lending standards and affordability trends are likely to accelerate the upward trend in default rates and credit stress.
Bank Lending Standards vs. HY Spreads and Default Rates
US Housing Affordability Index
With all this in mind, I am delighted to be able to tell you that not only do I believe that Fixed Income will be an attractive investment in terms of return for risk in 2023 but that it will also see:
All of the “bonus” characteristics mentioned above are long overdue for an asset class that has been predominantly driven by macro factors for large parts of the last decade. Those members of the Fixed Income community who have been conditioned like Pavlovian dogs to buy each dip have either been sent back to puppy school already or will be heading there at some stage over the next few years. The fun is certainly not over yet, folks!
To summarize, when it comes to our overall risk appetite within the asset class, we tend to deconstruct our view into the following: fundamentals, technical, value and tail risks. Our Risk Appetite (+2 from 0) has moved into positive territory off the back of the recent shifts that we have seen both in terms of Value (credit re-pricing) and the reduced possibility of further overshoot on inflation and rates. Although we will provide more details on this in future pieces, our current Risk Appetite view for the asset class as seen through this method is:
Economic outlook
(+1 notch)
Recession fears and stubbornly high inflation coupled with expected energy stress over winter continue to provide an uncertain economic backdrop, but mild weather has eased concerns based on the latter.
Credit Fundamentals
(-1 notch)
Generally, fundamentals have started to deteriorate and are expected to weaken going forward as reflected by worsening credit metrics in earnings reports.
Valuation & Technicals
(+1 notch)
Most credit markets have priced-in a recession, which makes valuations look even more attractive. While investor positioning remains light, outflows of fixed income have started to slow.
Tail risks
(+1 notch)
Risk of a Fed overshoot remains, but has been reduced by potential pivot. Immediate effect of energy crisis has recently been softened by mild weather.
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Key take-aways within the underlying sub-assets classes and milestones to look for include:
In summary, we find ourselves against the backdrop of the market shifts seen last week, which are having an overall strongly bullish medium-term view on Fixed Income, but with significant bias towards simplicity and liquidity.
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