Bond markets and the road to net zero

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Investment managers and analysts must take account of a range of potential threats and opportunities facing global markets in 2022. Here Scott Freedman, portfolio manager at Newton Investment Management, outlines his thoughts on the prospects facing global fixed income markets as we transition to a low carbon economy.

What is the most important event/data or threat you will be watching in 2022?

“While fixed income markets continue to provide some positive investment opportunities, they also face a range of potential threats in 2022, particularly those relating to inflation and the removal of monetary stimulus by the central banks.

We anticipate that these concerns will be influenced by government bond markets until the second quarter of next year. From that point on, we would expect to see a more stable safe-haven yield environment.

In terms of landmark opportunities, we believe the role fixed income markets have in funding our transition away from carbon intensive economies should become increasingly critical.

Most of this funding is expected to be financed by debt from sovereigns, development agencies and corporates, not equity. It should come through green, social, sustainable and sustainability-linked products, but, importantly, also through growth in labelled bonds (see chart below).

We expect to see continued material growth in demand for these products. While investors must be on guard against the threat of ‘greenwashing’ or overstating the environmental impact of products, we believe this growth in demand for labelled bond issuance and other sustainable fixed income assets, will continue at pace.

While the wider backdrop of monetary and fiscal policy will be important given the likely increasing quantum of debt, we believe both central banks and fixed income investors can and will play an increasingly pivotal role in directing capital to projects that can help transition the planet to a potentially more equitable, lower carbon global economy.

There are already some huge central bank stimulus programmes in place. But that is just a start. In future these institutions will feed capital through to private markets, with capital markets themselves playing a greater role in servicing society in positive ways.”

Scott Freedman, Portfolio manager, Newton Investment Management

773985 Exp: 26 May 2022

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