Global Rates – Adrian Owens

What were the major recent events and what were the impacts on your asset class?

Well, the big event has been the backup in bond yields and in particular the backup in real yields. So real yields now are up close to around 2.5%, depending on which market you look at. And that is having ramifications for asset classes more generally. And I think will continue to have an impact. So yes, for us, that's definitely the major consideration. I mean, inflation, of course, is very important, but the story there has been playing out a little bit more in line with the expectations. So at least for now, that's taking a little bit more of a backseat.

What can your asset class offer in the current environment?

We have a lot of degrees of freedom in our asset class and certainly that's helped by the fact that we are able to go short interest rates. I think we're in for a difficult period more generally in terms of returns to capital. I think particularly because of the backup in real yields that we're seeing. I think it's very important from a risk management point of view in terms of how you structure trades. So within our asset class, we're able to go long one market and short another against it. I think that helps to mitigate some of the risks, certainly from any exogenous shocks. I think that's going to be particularly important. Despite some of the issues surrounding markets, I mean, not just a backup in yields, but also some of the geopolitical risks, volatility has remained reasonably low. So I think as investors, we also need to be mindful of the risks of a pick up in volatility over the coming months. And of course, we have to remember as well in the background, quantitative tightening continues at some pace. So none of these are particularly great factors for markets more generally and your traditional asset classes.

What’s your outlook in the near and medium term?

Over the coming months, I think the backup in real yields will remain central to investors' decision making. I think because central banks are still active and the reaction function from the various central banks is still quite different. That creates opportunity. You know, if we think back a couple of years ago, the big focus was inflation and that really dominated price movements. Last year it was much more about central bank tightening. This year it's more nuanced. I think more generally, if we're looking for a bigger theme, it's one in which rates are going higher and remaining higher for longer than many people expected. So markets are now pricing in much higher terminal rates. And I think that's something that's likely to remain over the remainder of this year. But as I say, it's a bit more nuanced in the sense that we have had quite a lot of tightening and that is beginning to work and beginning to be felt. So I could see an environment where you need to be a little bit more tactical where investors one minute are focusing more on stubborn core inflation, but then shifting at times their focus more towards the fact that policy is working and the lead indicators are showing signs of a slowdown and then perhaps at times becoming a bit more optimistic about the rate outlook. So, yeah, need to be tactical, I think.

Is there one chart you’re currently monitoring closely?

There's always numerous charts. I know in the past I've mentioned the importance of the US labour market and jobless claims. I think for now, however, though, real yields are really important because that has knock on effects, as I say, not just for bond markets but for asset classes more generally.