Royal London Asset Management: Is this the year to decrease interest rate risk?

The recovery and inflation trades were the dominant themes of 2021 – a tough environment for global government bonds which provided negative absolute returns for the year, as yields trended upwards from low levels. However, with inflation expectations growing and nominal yields on the rise, real yields reached all-time lows. This saw global index-linked government bond funds perform very strongly and significantly outperform traditional government bonds last year. Looking into 2022, we expect nominal yields to continue creeping higher, as central banks begin to remove support from markets. We also expect buoyant global inflation markets to cool somewhat, pulling real yields higher from their all-time lows.

Waning monetary policy support will see yields trend upwards

Nominal yields are likely to rise in 2022 as central banks begin to remove monetary support, including rolling back vast quantitative easing (QE) programmes that have been in place since the beginning of the pandemic, and rising interest rates from record low levels. Most global government bond markets are well priced for rate rises at the short end at present – i.e. bonds between 0 and 10-years in maturity – so we expect the most significant yield rises to come from longer-maturity bonds, causing curves to steepen globally.

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