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Killing Me Softly Or Killing Me Quick: Investing in Default Risk Versus Inflation Risk

After more than thirty years trading bonds, which became super boring in the last fifteen, I am beginning to feel that the glory days of bond trading are coming back again. The main reason, of course, is that central banks are now fish out of water, grasping for tools in their toolkit. The playbook of “forward guidance”-driven policy is out the window, as is FAIT(H) (Flexible Average Inflation Targeting with “Hope” – my extension), and most important, the confidence in forecasts. This is beginning to create interesting opportunities for investors.

If the glory days of bond trading are coming back, then like me, you should dust off old bond textbooks and strategy papers and prioritize going back to evaluating risk and return in various bond asset classes from first principles. I have been refreshing myself on stuff that I learned thirty years ago on forward curves, spreads, expectations, defaults, inflation, cross-currency risk, risk-premia, and so on. My livelihood depends on this. Yours probably doesn’t, so let me highlight here what I believe are two of the most important things for market participants to consider right now when deciding where to potentially put their money.

The full note on this important topic can be downloaded at this link: LTA Thinking – Killing Me Softly Or Killing Me Quick