Investment-grade bonds are the next yield play

LAST year, policymakers embarked on one of the most aggressive rate-hiking cycles to deal with an inflation problem that the world had not seen in more than 40 years. Conventional wisdom would assume that high interest rates would fix the soaring levels of inflation. Tighter policy would deter economic activity; credit becomes more expensive for consumers to spend and companies to invest; and saving is incentivised.

But these are not conventional times. The mechanisms above are largely effective in stymying private-sector credit creation.

However, what if private-sector money creation was not primarily responsible for the inflation observed today? What if the supply side is more impacted, as geopolitical tensions impede the free flow of goods, labour and capital? What if demand was more fuelled by rates-insensitive deficit spending rather than private sector/household borrowing?