Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Reasons for optimism in 2022 - Global Strategic Bonds strategy

  • 25 January 2022 (5 min read)

Strategy update

There is no doubt that 2021 was a difficult year for fixed income returns in light of the strong rebound in GDP growth and some of the highest inflation prints in many decades, which have followed the gradual unlocking of economies as we cautiously learn to live with the pandemic. Markets have focused on resulting expectations for central bank policy, with interest rate rises and the tapering of asset purchasing programmes high on the agenda. Unsurprisingly in this environment, duration-sensitive assets struggled in 2021. However, asset classes such as high yield – driven by low default expectations and tightening credit spreads, as well as inflation breakevens – fuelled by rising inflation that proved not to be as short-lived as central banks expected, fared much better. The story was more complex for emerging markets, which notably suffered from heightened volatility in Asia – particularly in the Chinese property sector.

The Global Strategic Bonds strategy delivered a flattish return in 2021, with an absolute performance of +0.30% (gross of fees in USD). Since inception in May 2012, the long-term performance of the strategy remains very attractive, with a cumulative total return gross of fees in USD of +58.73% (+4.91% annualised).1 Despite a tough start to 2022, here are some reasons why we believe the case for a flexible, unconstrained approach to fixed income investing remains a compelling proposition.

Reasons for optimism

Market pricing for monetary policy may be too aggressive

In many ways, 2021 was defined by market expectations for central bank policy in the wake of higher inflation data, which provided to be stickier than originally anticipated, along with strong growth as economies kicked into life again. 2022 should see a continuation, and even escalation, of the “reopening” theme. However, central banks face a difficult balancing act between “normalising” policy to tackle inflation, whilst ensuring that growth remains robust. Therefore, as the market aggressively prices in interest rate rises (in the US, the market is now pricing in four Fed hikes in 2022), it is perhaps worth considering the potential for central banks to disappoint the market – given the current starting point of incredibly loose policy and an uncertain outlook. We also remain firmly in the camp believing that inflation should subside in 2022 as supply chain issues subside, demand normalises somewhat, and attention turns once again to the deflationary impacts of ageing demographics, globilisation and an increased reliance on automation and technology. No doubt we will move to tighter financial conditions in 2022 and rate rises are inevitable (indeed the Bank of England have already hiked in December), but the more aggressive market pricing for rate rises gets, the more excited we get about the potential opportunity.

Higher yields, higher carry

Fixed income can often be simplified: what we are witnessing at the moment is an asset class that is getting cheaper. For many investors, particularly institutional – who are less price sensitive but need to own high quality government bonds for regulatory reasons – the valuation argument for buying bonds is strengthening by the day. Clearly, timing is key and many will be cautious that yields may have some way to go higher still, but just like Q1 2021 when everyone fixed on US 10-year treasury yields going through 2% (they peaked at 1.75%), there is a level at which cheaper bond yields may become too much for many to resist – thereby creating a powerful technical demand for the asset class – particularly if the economic recovery hits further bumps in the road. It is worth considering also that credit spreads are at historic tights following the recovery since March 2020 and that any sort of repricing could be perceived as a buying signal for many.

Consecutive negative years for bond returns are very rare

In 2021, developed market government bonds unanimously delivered a negative calendar year return. It is worth noting that this is a pretty rare occurrence. Taking the broad US treasury market as an example, 2021 was just the fifth negative return year since the index began in 1978 (i.e. 44 calendar years). More notably still, there has never been consecutive negative return years. In fact, the years after a negative return have tended to bounce back strong: in 1995 the treasury market delivered a +18.5% return, whilst in 2000, 2010 and 2014 it posted +13.4%, +5.9% and +6.0% respectively. Although we would clearly stop short of guaranteeing a similar outcome in 2022, the same logic applies that, after a sell-off, a recovery tends to follow. Emerging markets is another asset class to watch in this respect after a difficult 2021. Sentiment towards fixed income is pretty low at the start of 2022, meaning that it shouldn’t be too difficult for it to surprise investors to the upside!

Appetite for risk remains strong

Despite the emergence of the Omicron variant, the outlook is still positive for high yield. We do not see default rates moving much off historic lows and Covid-related growth scares could keep the Fed from tightening too much, which could be positive for high yield if there still is some growth. While acknowledging some outflows from retail investors, appetite for the asset class remains strong as global fixed income markets still offer little yield for institutional investors and the US HY default rate remains at record lows. Recent market weakness has slightly improved the total return outlook for the US HY market, which should help with market sentiment as investors analyse their asset class allocations for 2022. From a technical supply/demand perspective, we see positive drivers due to the amount of potential rising stars next year and beyond, with an estimated $80-120bn of bonds to be upgraded to IG in the near future. This means that those bigger issuers will fall out of the HY index and become IG issuers.

Fixed income is not one asset class

Underpinning all these convictions is the ultimate belief that a diversified and flexible approach to fixed income can deliver attractive risk-adjusted returns over an economic cycle. 2021 was another reminder that, although government bonds and emerging markets lost money, there were strong positive returns in inflation-linked assets and high yield. Our simple and transparent investment framework, founded on three “risk buckets” (Defensive, Intermediate and Aggressive), allows us to access a broad range of fixed income asset classes where we can own bonds with negative yields all the way to double digit yields. With this broad opportunity set at our disposal, we remain convinced that there is money to be made in fixed income in 2022 and beyond.

The strategy is actively managed without reference to any benchmark.

  • IFNvdXJjZSBvZiBhbGwgcGVyZm9ybWFuY2UgZGF0YSBpcyBBWEEgSU0sIGdyb3NzIG9mIGZlZXMgaW4gVVNELCBhcyBhdCAzMS8xMi8yMDIxLiBQYXN0IHBlcmZvcm1hbmNlIGlzIG5vdCBhIHJlbGlhYmxlIGd1aWRlIHRvIGN1cnJlbnQgb3IgZnV0dXJlIHBlcmZvcm1hbmNlLiBUaGUgc3RyYXRlZ3kgbGF1bmNoZWQgb24gMTEgTWF5IDIwMTIu
Read the full article
Download report (204.83 KB)

Have our latest insights delivered straight to your inbox

Subscribe to updates.

Related Articles

Fixed Income

Why flexible investing may help overcome obstacles

  • by AXA Investment Managers
  • 30 August 2023 (3 min read)
Fixed Income

Themes in focus for Global Strategic Bonds

  • by Nick Hayes
  • 13 December 2022 (5 min read)
Fixed Income

New opportunities for bonds as the rules of the game evolve

  • by Nick Hayes
  • 04 August 2022 (5 min read)


    This promotional communication does not constitute on the part of AXA Investment Managers a solicitation or investment, legal or tax advice. This material does not contain sufficient information to support an investment decision.
    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.
    The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.
    AXA WF Global Strategic Bonds is a sub-fund of AXA World Funds. AXA WORLD FUNDS ‘s registered office is 49, avenue J.F Kennedy L-1885 Luxembourg. The Company is registered under the number B. 63.116 at the “Registre de Commerce et des Sociétés” The Company is a Luxembourg SICAV UCITS IV approved by the CSSF and managed by AXA Funds Management, a société anonyme organized under the laws of Luxembourg with the Luxembourg Register Number B 32 223RC, and whose registered office is located at 49, Avenue J.F. Kennedy L-1885 Luxembourg.
    Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. References to league tables and awards are not an indicator of future performance or places in league tables or awards and should not be construed as an endorsement of any AXA IM company or their products or services. Please refer to the websites of the sponsors/issuers for information regarding the criteria on which the awards/ratings are based. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.
    Representative Accounts have been selected based on objective, non-performance based criteria, including, but not limited to the size and the overall duration of the management of the account, the type of investment strategies and the asset selection procedures in place. Therefore, the results portrayed relate only to such accounts and are not indicative of the future performance of such accounts or other accounts, products and/or services described herein. In addition, these results may be similar to the applicable GIPS composite results, but they are not identical and are not being presented as such. Account performance will vary based upon the inception date of the account, restrictions on the account, along with other factors, and may not equal the performance of the representative accounts presented herein. The performance results for representative accounts are gross of all fees and do reflect the reinvestment of dividends or other earnings.
    Issued in the U.K. by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the U.K. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ (from 1st January 2021).

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. 

    Are you an IFA or other Professional Investor ?

    Are you a financial advisor, institutional, or other professional investor?

    This section is for professional investors only. You need to confirm that you have the required investment knowledge and experience to view this content. This includes understanding the risks associated with investment products, and any other required qualifications according to the rules of your jurisdiction.