The new macroeconomic regime will likely present shorter and more pronounced cycles and a greater occurrence of idiosyncratic risk - whether from country, sector or individual issuer.
Wellington Management believes the new regime creates four compelling reasons for fixed income investors to seek global diversification:
1. Opportunities across an inconsistent global policy landscape
Central banks are at different stages of the cycle. The US may potentially face a meaningful tightening in credit conditions, potentially prompting the Federal Reserve (Fed) to end its hiking cycle. In Europe, the European Central Bank (ECB) is starting to reduce its balance sheet, following a decade of significant purchases.
The reversal of that support, along with further monetary policy tightening, could represent a significant headwind for European rates.
2. Position for less predictable inflation ahead
The outlook for inflation remains muddier than in previous recessions. In this environment, home biases may be overly reliant on past assumptions.
For example, over the past decade the euro area has been a source of disinflation for the world. This appears to be reversing, with headline and core inflation now consistently above the G7 average.
This post is funded by Wellington Management
