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Market Insights

Protecting Capital in an Inflationary Environment
January 2022 Market Commentary
February 2022

Imran Dhanani
Principal, Director, National Accounts & Product Strategy

Vincenzo Bufalino
Analyst, Client Portfolio Management

Typically, equity and bond prices move in opposite directions. However, 2022 has begun with both assets moving lower together. This recent behaviour stems from changing expectations around monetary policy and is driven by changes in the pace of inflation, higher probabilities of interest rate hikes, and other policies that could drive bond yields higher (and prices lower).

The latest US CPI reading released today showed a year-over-year inflation increase of 7.5%, leading US markets to now expect a 50bps increase in rates in March and approximately 6 to 7 rate hikes in 2022 in total.

Closer to home, the Bank of Canada decided not to raise rates during its meeting in January, which was a surprise to markets. Notwithstanding its decision, inflation in Canada continues to rise and recently peaked at 4.8%, causing a gap between this measure and the overnight rate.

Inflation vs. BoC Overnight Rate
Source: Bank of Canada, Statistics Canada


We have reduced the interest rate risk in our strategies over the past 6 months during this volatile period, which has led to meaningful amounts of capital preservation relative to traditional bond indices. 
We are not trying to time the bottom of the rates cycle, but rather patiently waiting and keeping risk levels at or near their lows.

We have begun using the volatility and dispersion in credit markets to extend our highest conviction themes, including:

1. Banks and financials that benefit from higher rates and have strong regulatory frameworks,
2. Companies with solid funding profiles and a high chance of a ratings upgrade, and

3. Improving credits that are still benefiting from re-opening exposure globally.

Geographically, we have reduced our exposure to EUR-denominated credit markets given the expectation that the European Central Bank would need to become more focused on withdrawing stimulus and increasing rates later this year. 

This is an exciting time for us as bond investors, and the coming months should give us the opportunity to demonstrate our focus on capital preservation and allow us to search for compelling return opportunities for our investors.
 

 

 
 

 

 

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The information herein is presented by RP Investment Advisors LP (“RPIA”) and is for informational purposes only. It does not provide financial, legal, accounting, tax, investment, or other advice and should not be acted upon or relied upon in that regard without seeking the appropriate professional advice. The information is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does RPIA assume any responsibility or liability whatsoever. The information provided may be subject to change and RPIA does not undertake any obligation to communicate revisions or updates to the information presented. Unless otherwise stated, the source for all information is RPIA. The information presented does not form the basis of any offer or solicitation for the purchase or sale of securities. Products and services of RPIA are only available in jurisdictions where they may be lawfully offered and to investors who qualify under the applicable regulation. RPIA managed strategies and funds carry the risk of financial loss. Performance is not guaranteed and past performance may not be repeated. “Forward-Looking” statements are based on assumptions made by RPIA regarding its opinion and investment strategies in certain market conditions and are subject to a number of mitigating factors. Economic and market conditions may change, which may materially impact actual future events and as a result RPIA’s views, the success of RPIA’s intended strategies as well as its actual course of conduct.