Fixed income markets faced a tumultuous year in 2022, as central banks raised rates at a pace and magnitude unseen for decades to curb inflation risks. The repricing in core rates sent shockwaves across global capital markets, diminishing portfolio diversification as the correlation between bonds and equities turned positive.
Inflation was the primary driver for fixed income in 2022, with price rises spreading first from goods to services and then into potentially more persistent core areas due to rising wages. By March, the U.S. began to lift policy rates in addition to accelerating its tapering of large-scale asset purchases.
By the time 2022 drew to a close, the U.S. Federal Reserve had lifted its benchmark interest rate from historical lows around zero to 4.5% – its highest level since 2007 – and pledged further tightening in 2023. These represented the most aggressive U.S. policy moves since the early 1980s.
It was a similar story in Europe, as policymakers first collaborated closely on political and fiscal efforts to combat an intensifying energy and economic crisis. With significant inflation risk to the upside, European central banks then turned hawkish, pledging to defend price stability.
Japan was the last developed country to begin tightening, widening its yield curve control band to +/- 50bps in late December 2022.
As central banks tightened sharply, the combination of higher rates and declining liquidity conditions fueled market volatility, at times to levels last seen during the global pandemic.
Meanwhile, emerging market economies recorded the worst year of asset performance since 2008. Nevertheless, local central banks kept pace with tightening in developed markets, allowing inflation to remain under control and valuations to adjust. Later in the year, risk assets rallied sharply as China abandoned its zero-COVID policy and amid growing hopes that inflation had peaked.
Similarly, 2022 was a very difficult year for credit markets, with spreads facing significant pressure. But the year also saw periods of spread tightening as the market whipsawed between concerns around the future of the economy and more positive news from resilient corporate earnings and a continued recovery in post-pandemic consumption.
Looking ahead, we expect fixed income markets to pause for breath after the sharp adjustments in core rates over the past twelve months. However, lingering uncertainties remain around the trajectories of key macro variables – growth, inflation, the labour market – and policy stances across major economies.
In 2022, the Fixed Income Department (FID) continued to capitalise on its fully active mandate, having transferred its passive investments to ADIA's Core Portfolio Department a year earlier. FID's inbuilt flexibility enabled it to navigate the complex market conditions by targeting return-enhancing opportunities across the full spectrum of fixed income assets.
Over recent years, FID has sought to diversify its sources of return with quantitative strategies, building out its internal team of specialists and implementing robust risk-management processes. In mid-2022, this team began to deploy capital in targeted strategies, with positive returns, and they plan to develop this further in the year ahead.
As a result, FID is structured to pursue diversified outperformance from three core teams: Internal, External, and Quantitative.
