Global Head of Fixed Income Jim Cielinski discusses some of the many issues facing bond investors, including the shift in narrative from policy makers and the importance of sustainability within fixed income as world leaders gather for the UN Climate Change Conference of the Parties (COP26).

Key Questions

• From an investor perspective, is COVID behind us?
• Should investors fear tapering?
• Are markets being complacent?
• What role can fixed income play in sustainability?

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Jim Cielinski: One of the questions we get is whether or not COVID is behind us, and the answer is no, and I think that’s true on several fronts. First of all, the actual pandemic is ongoing. Huge swathes of the globe are still unvaccinated, and the Delta variant continues to kind of push through different economies, and we’re seeing that it has a real impact. Moreover, we’re not yet through the supply chain bottlenecks that have characterized the post-pandemic economy in the U.S. and in Europe. And then finally, I would just say that when you have a crisis – and this pandemic was the worst crisis we’ve had in some time – you’re never through that until you get the next crisis. My theory is that we’re always fighting in markets and economies the last crisis. And the events that were unleashed by COVID-19, such as quantitative easing, easy money, just-in-time supply chains, all these things will be impacted permanently. And, so, we’re going to be living with the after-effects of COVID for a long, long time.

There’s a lot of fear today about where next for monetary policy and a lot of fear about tapering. And I think it’s right that markets are nervous because, first of all, no one is fighting the exact same war as every other country today. There’s divergence.

Some economies are already tightening, raising interest rates. In the U.S., tapering has become well-advertised. And [in] some other economies, we may not see tightening for some time. I think this divergence is likely to lead to higher volatility.

I think that is what investors should be aware of. Should you worry about tapering, generically? I would say no. This is a removal, I think, of emergency accommodation. And if that’s what economies need and it’s the right thing, and markets believe that, and it will forestall even more tightening later, then it can be a good thing. And I think that’s what markets have chosen to believe up to this point.

It does introduce uncertainty. It increases the odds that maybe policy makers get it wrong. And that’s what you should keep your eye on. But tapering by itself, if it is appropriately managed, does not have to be a big negative for markets, in my view.

Markets of most types, and certainly risk assets, have been on a tear in the last 12 months. And it’s introduced, I think, fears that markets may be complacent today. We know about how policy could shift. We see inflation fears. And yet markets look through this and keep marching upward. I think there is a degree of complacency. But again, the fundamentals are very supportive, and I think as long as that remains the case and, critically, as long as inflation remains transitory, it will allow both markets and policy makers to look through this period of strength. And I think that’s key to keeping markets going. Now, the markets have already decided that they do feel a lot of this is transitory. So that’s, I think, the risk/reward that investors should keep in mind. There’s a lot in the price. It doesn’t mean the markets are wrong, but it does mean the cost of an error – in the economy, in inflation, in the outlook, in policy – the cost of those errors could be a bit more asymmetric than they normally are.

I think it’s very important in times of uncertainty for investors to be much more selective. When the rising tide has lifted all boats, a lot of that can be fair, but a little bit of it can be unfair. So those companies that are truly seeing fundamental improvement, those companies that are well insulated from a potential shock to the economy and those companies that have sustainability really at the core of their ethos, I think those are the kinds of companies that will emerge from this next period in good shape.

Sustainability is a theme that has really taken off within fixed income, but also all asset classes. And I think it’s particularly important with the UN Climate Change Conference taking place this November, that ESG as a theme, but also sustainability as just an overarching view on how we approach the analysis of companies, I think has really become embedded for us in our own processes.

I think sustainability will determine which companies thrive in the next 10 to 20 years. And I think fixed income investors, even though we are not stakeholders in the traditional sense, like equity holders, we’ve learned that engagement with companies can make a big difference. We can impact the cost of capital for companies, and we can engage with them to show them what we feel is the right way to proceed.

Yields are low in the market today, and there is a silver lining to that. That actually allows companies and countries, through the low cost of debt, to bring forward a lot of technological changes and embrace these sustainability initiatives.

It’s important, I think, that we take advantage of these opportunities, because we can’t wait. And the ability to bring these forward, I think, will truly define what companies thrive and don’t thrive in the next decade.

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