Core fixed income allocation, usually comprising high-quality government and corporate bonds, has played a relevant role in diversified portfolios over the last few decades. In a 30-year bull market for bonds, this allocation has been a stable source of performance; it has, for a long time, provided interesting income and helped to limit the overall portfolio drawdowns. Investors now stand at a crossroads: changes in central banks’ monetary stances are resulting in the end of the easy money era driven by excess market liquidity. This change will provide, in our view, a fertile ground for active bond investors able to dynamically exploit opportunities in multiple fixed income sectors while it could challenge more traditional and static fixed income allocation approaches. The end of easy money could trigger opportunities for “alpha”1 strategies; for example, tactical duration management and relative value strategies, within and across yield curves, will be more relevant as interest rate risk rises and market duration stands at historical highs. Searching for income across multiple sectors, including emerging markets, with a dynamic approach, will also be key to exploiting yield opportunities in a rising rate environment. Corporate bond selection will make a difference, as conditions in credit markets are becoming more mature, with spreads already quite tight across the board. Currency dynamics will also be relevant as an additional source of returns, showing low correlation with traditional asset classes, and as a variable to consider when investing in global markets.

Liquidity risk management should be at the forefront of investor priorities in the new investment landscape. In fact, this risk could re-emerge with worsening liquidity conditions in the market amidst CB balance sheet reduction. Being able to play opportunities across the liquidity continuum, maintaining sufficient liquidity buffers, tactically allocate to government bonds for liquidity purposes or further enhance diversification with liquid strategies, such as currency alpha strategies that carry no credit and liquidity risks, will be a major competitive advantage in our view.