FICC (Fixed Income, Credit & Currency) Forum 2024
[i3] FICC Forum | Investment Innovation Institute

FICC (Fixed Income, Credit & Currency) Forum 2024

The multi-decade bull run of bonds came to a swift end in 2022, when the Reserve Bank of Australia (RBA) decided to increase the interest rate for the first time since 2010. In May 2020, the RBA kicked off a series of hikes that included 13 rate increases.

A further 25 basis point increase might still be on the cards, according to the bank’s December minutes, if inflation pressures don’t show signs of slowing down in 2024.

“The case to raise the cash rate target by a further 25 basis points was centred on the observations that inflation was expected to remain above target for a prolonged period and that there were risks this period could be extended. Members noted that inflation was increasingly being driven by domestic demand. They also observed that underlying inflation was higher in Australia than in several other countries.”

Yet, the RBA left the cash rate unchanged in December and market participants seem to pencil in rate cuts next year, rather than a further increase.

The expectation of rate cuts is largely based on developments in the United States, where in mid-December the Federal Reserve flagged it could implement up to three rate cuts in 2024, as the inflation rate was easing and the economy showed lacklustre activity levels in recent months.

“Recent indicators suggest that growth in economic activity has slowed substantially from the outsized pace seen in the third quarter,” Jerome Powell, Chair of the Federal Reserve, said in December.

It was a surprising move as only a few weeks earlier Powell said the Fed wasn’t ready for rate cuts yet.

In Australia, the RBA said inflation was increasingly demand-driven and there was a risk it could remain above its 2 – 3 per cent target band beyond December 2025. But in making its next rate decision, the bank will also take international developments into account, the minutes read.

“Members agreed that whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend on how the incoming data alter the economic outlook and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.”

A reduction in interest rates would be a boon for investors that have stocked up on bonds in 2023, as yields became attractive again. But the prospect of a new rate cutting cycle would also make it less attractive to invest in these defensive assets going forward.

  • What does this heightened uncertainty mean for institutional investors and their fixed income portfolios?
  • Which part of the curve is most attractive at this stage of the cycle?
  • What type of fixed income instruments thrive under these conditions?

 

What we perhaps can say is that the market conditions for fixed instruments look more gentle than they have been over the last 18 months. As such we have chosen the ladybug or lady beetle to represent this forum.

The lady beetle is not only a rather gentle insect, but it is also a useful one.

Farmers love this creature as it devours many agricultural pests, including aphids, small sap-sucking insects that if left unchecked can destroy crops. Lady beetles can eat up to 5,000 aphids during their lifetime and are so effective that they have been introduced by farmers in other countries, including North America.

In fact, the story goes that the lady beetle’s ability to control pests is where they got their name from. According to National Geographic, the name was coined by European farmers who prayed to the Virgin Mary when pests began eating their crops.

After ladybugs came and wiped out the invading insects, the farmers named them ‘Beetle of Our Lady’. This eventually was shortened to ‘lady beetle’ and ‘ladybug’.

Let this gentle insect be our mascot for this forum and symbolise the anticipation that 2024 might be a fruitful year for fixed income investing.

We hope to see you at the 8th Fixed Income, Credit & Currency (FICC) Forum.