Highlights:

• It looks like the Global Aggregate index will end 2023 below water for a third consecutive year: there has been no bounce back from the historically large drawdown of 2022. Fixed income markets have paid a dear price for successive supply chain disruptions and the adventurous policy mix of the past years, characterised by a massive global policy easing through the pandemic and a sharp divergence between US fiscal and monetary policy over the past 18 months. 
• The future is always uncertain, but maybe even more so now that the World Order is changing fast: the US hegemony is contested, conflicts and wars have burgeoned, and the security of supply chains now matters as much as their efficiency. All this may change the growth-inflation mix – in a bad way.
• Even though we raised our estimate of equilibrium rates in the medium term, the now much higher level of yields makes Fixed Income more attractive in terms of 5-year risk-return, especially Cash, Treasuries, and IG Credit (see chart below). We acknowledge that public debt sustainability concerns may justify lower than average credit and equity risk premia (vs. Govies) in the future, but investors will likely not get paid enough for credit and equity risk on a 5-year horizon. For those accepting the risk, returns on EM hard currency debt ranks highest. 
• Among a plethora of risks, two stand out. First, yields may stay high(er) for longer on stubborn inflation expectations, lavish central banks or renewed stagflationary shocks (BTPs most exposed). Second, cracks in the financial plumbing, emanating from the higher cost of rolling debt over and large unrealised losses across investor books, could trigger a deeper recession or – worse – an outright financial crisis (risk assets most exposed). On the bright side, a Goldilocks scenario (soft landing, quick disinflation), would be more bullish for Equities and HY Credit
   

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