September is not usually a good month for bond investors and this month proved to be no exception. Total returns for EUR investment grade (IG) and USD IG bonds were deeply negative at –2.8% and –4.7%, respectively as central banks are committed to bringing down inflation no matter the costs for financial markets or the global economy.
Given the central banks’ focus on inflation and the labour market, both lagging economic indicators, the US Fed in particular might choose to overlook the first signs of easing inflationary pressure. Such signs can already be seen in commodity markets and market-implied inflation expectations, which have been in a downward trend since June. In Europe, the inflation story remains highly unpredictable due to the energy crisis and the ongoing fiscal response to it. Given the ongoing monetary policy tightening despite elevated recession risks, financial markets have started to show signs of distress in recent days with outsized daily moves especially in foreign exchange and fixed income markets. While credit markets are still holding up relatively well amidst very low new issue volumes and conservatively positioned investors, the prospect of a deeper and longer slowdown could start to weigh on credit spreads again.
