Fixed income Steve Ellis Global CIO, Fixed Income A new era for interest rates Bond yields are finally starting to look attractive again but are they priced for the scale of the downturn ahead? Fixed income markets head into 2023 hopeful of wrecking ball for a growing number of markets. a long-awaited shift to a new reality, yet the end At some stage, the Fed and other central banks of more than a decade of monetary largesse may be forced to balance their inflation-fighting has brought with it substantial risks. mandates with the need for financial stability. Central banks continue to tighten financial Chart 5: Corporate bond yields begin to look conditions, increasing the risk of an inflation bust more attractive versus dividends across a glut of economies. Even if policymakers Corporate IG yields minus dividend yields since 2002 are forced to back down by markets and the 8% scale of the prospective slowdown, we believe interest rates will settle far higher than they have 6% been at any point over the past decade. 4% This should be good for bonds, which have 2% struggled through a decade of zero yields, but 0% there are the first signs of cracks in financial -2% systems in response. UK authorities’ struggle -4% with the fallout of a budget full of unfunded tax 2005 2010 2015 2020 giveaways may well prove a model for others. US Europe The Federal Reserve in particular is pressing on Source: Refinitiv, Fidelity International, October 2021. with tightening that has turned the dollar into a 14 Investment Outlook Fidelity International