Fixed Income Portfolios Are Challenged

Look beyond the headlines to discover the driving forces behind market trends and consider how they impact a credit union’s investment portfolio.

Top-Level Takeaways

  • High credit quality fixed income portfolios were challenged in 2021 by higher rates and elevated interest rate volatility, fueled by inflation worries and anticipation of the Fed’s response.
  • Inflation remains the predominant economic theme to begin 2022, and COVID-19 has once again proven to be a difficult risk to remove from growth and inflation forecasts.
  • Recent data indicates supply chain disruptions and associated cost increases might be easing, but other sources of inflation from tight labor markets and a hot housing market present ongoing risks.
  • The Dec. 15 FOMC decision was more in line with what bond markets had been pricing for several weeks with regard to rate hikes and the pace of tapering; balance sheet normalization remains an outstanding question for investors.

It was a challenging year for fixed income investors in 2021. Most of the investment-grade universe posted negative returns for the year on an unhedged basis, and only certain sectors down the credit scale were able to generate positive returns in the face of higher interest rates.

At the root of 2021’s underperformance was market speculation of changes in Fed policy, fueled by the predominant economic theme that persists into the New Year — inflation. With Fed chair Jerome Powell and his colleagues at the FOMC standing poised to combat rising consumer prices in 2022, most street outlooks forecast less-than-rosy predictions for fixed income performance during the next 12 months as well, although, as always, those opinions rely on many assumptions of the unknown.

December also provided another reminder that COVID-19 has, unfortunately, not been eradicated. Beyond the public health impact, it can still affect economic growth and inflation forecasts. The virus rocketed back to the top of mainstream news headlines via the rapid spread of the omicron variant, but the ultimate economic impact is still unknown. If cases are more moderate, it could have more limited influence on consumer demand while negatively impacting supply chain flows further. The latter would potentially add more fuel to inflation pressures globally.

Despite COVID-19 and other risks, the U.S. economy continues to do well. Although not at the torrid pace of the past six quarters, real GDP growth is expected to remain above long-term trends in the first half of 2022 before slowing in the third and fourth quarters.

This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit to read about the latest economic data and overall market trends.

January 17, 2022

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