Fixed Income

The bold and prompt response from global policy makers, including an unprecedented scale of fiscal and monetary support for households, SMEs and corporates, was able to moderate the impact of the Covid-19 pandemic across sectors and countries.

In developed economies, central banks lowered policy rates while introducing (or in some cases restarting) quantitative and credit easing programmes. As a result, the balance sheets of the G4 central banks – the US Federal Reserve (Fed), the European Central Bank (ECB), Bank of Japan, and Bank of England – ballooned by more than US$8 trillion during 2020, and continued to rise. In Europe, aggressive central bank easing and pledges to stay lower for longer resulted in record low core rates and the compression of peripheral yield spreads.

Both inflation and inflation expectations declined sharply through the year as negative demand shocks outweighed supply bottlenecks. The Fed announced its strategic monetary policy review, which stated the flexible nature of its inflation targeting framework and a greater willingness to tolerate temporary inflation increases. The ECB’s strategic review was postponed to Q2 2021.

The US dollar peaked in March as the market sell-off intensified but, as global policymakers unveiled unprecedented stimulus and easing, it weakened across the board while risk assets rallied.

Many emerging market economies also lowered policy rates to record lows and some started small-scale quantitative easing. Emerging market assets experienced a V-shaped recovery during 2020: after a massive plunge in March, the rest of the year was marked by a strong recovery backed by hard currency flows. Emerging market local currency bonds were buoyed by the broad-based policy easing as well as emerging market central banks driving real policy rates to new record lows.

Similarly, credit markets had a dramatic year, suffering one of the sharpest sell-offs in history before spreads narrowed as 2020 wore on. The rebound accelerated in November as successful vaccine developments brought the prospect of an economic recovery during 2021 firmly into focus.

In 2020 ADIA’s Fixed Income & Treasury Department continued to apply its prudent investment philosophy and disciplined risk and liquidity management capabilities in pursuit of its objectives.

The Department’s Single Pool Framework, introduced in 2019, was successful in increasing the overall flexibility of investment processes while reducing complexity, and allowed for the management of more of the portfolio under a single active risk budget during the year. The Department also automated a number of business processes to further improve operational efficiency.

In the year ahead, the Department will continue to explore ways to expand the use of data in the investment process. New tools and technologies will also be used to enhance the Department’s research capabilities, increasing efficiency and the overall scope and depth of its output.

For fixed income markets, market consensus expects major economies to stage a strong recovery during 2021, particularly in the domestic services sectors that were hardest hit by the Covid-19 pandemic. However, large output gaps remain and strong policy supports are expected to continue for years to come. There are numerous risks associated with the outlook, chief among them delays associated with vaccine distribution and the market reaction to any tapering of quantitative easing programmes.