From inflation to fiscal risk: The new fault lines in global fixed income

For Gregoire Pesques, chief investment officer for global fixed income at Amundi, the most persistent mistake investors make in bond markets is believing they are buying simplicity. Fixed income, he argues, is often treated as a defensive allocation, when in reality it is a multi-dimensional risk exercise that demands breadth, flexibility and a willingness to abandon home-market comfort.

Speaking about client behaviour across regions, Pesques notes that Australia has long been ahead of the curve in embracing global bond allocations. “Australia, and Asia more broadly, have this allocation anchored around a global benchmark,” he says, pointing out that many investors now prefer to outsource geographic decisions to managers with genuine global mandates rather than run tactical tilts themselves.

At the centre of Amundi’s approach is the global aggregate benchmark. Pesques describes this benchmark as the most complete expression of diversification in investment-grade fixed income. “The global aggregate, you have all the main countries, all the main asset classes, sovereign, agencies, investment-grade credit,” he says. “It’s highly diversified by region, by issuer and by source of risk, while staying investment-grade and of good quality.”

A long track record, built across cycles

Pesques places significant emphasis on experience across market regimes, arguing that longevity is not a marketing point but a structural advantage. Amundi’s flagship global aggregate and global credit strategies have an 18-year track record; a period that includes multiple interest-rate cycles, crises and policy mistakes.

“When you have a track record for 18 years, it means that you went through different cycles and different market situations,” he says. “The information ratio is close to 0.8, which means you have been adding value to clients.”

Performance, in his view, flows from process rather than prediction. Since inception, the strategy has delivered more than 7 per cent annualised in US dollar terms, with excess returns of around 3.8 per cent a year. Those outcomes, Pesques argues, validate a framework that starts with opportunity set rather than asset labels.

“The first prerequisite is to have a large universe,” he says. “If you are on a very small universe, you have very few opportunities, and across cycles you will generate performance with a lot of volatility.”

But scale alone is not enough. The more important discipline, he argues, is intellectual neutrality. “If you really want to benefit from the full set of opportunities, you need to be completely unbiased,” Pesques says. “If you have a regional bias, a country bias or an asset-class bias, there will be moments in the cycle where you simply cannot deliver value.”

This is where he draws a sharp distinction between truly global managers and those who are global in name only. “When I look at some competitors, they have 85 per cent in dollar assets,” he says. “That can be a very good US portfolio, but it is not a global portfolio.”

Rethinking how risk is constructed

One of Pesques’ more provocative arguments is that traditional asset allocation frameworks obscure risk rather than control it. Buying a credit market exposure, he notes, bundles together interest-rate risk, credit risk and currency risk, often without investors fully appreciating the mix.

“When you buy US credit, you buy three things,” he explains. “You buy US rates, you buy a US spread, and you buy the currency. At the end, you are not sure you are controlling duration, credit risk and currency risk in the way you think.”

Amundi’s alternative is to deconstruct portfolios into their core risk drivers. “Instead of starting with asset allocation, we look at how much interest-rate risk we want, how much credit risk we want, and how much FX risk we want,” Pesques says. “It allows you to fine-tune risk and build portfolios with no hidden exposures.”

This framework also underpins the firm’s heavy use of relative-value strategies. Rather than relying on big directional calls, Pesques prefers trades that express valuation differences between countries, curves or currencies. “You can generate performance outside the big market direction,” he says, noting that curve positioning alone contributed more than one percentage point of outperformance in the past year.

Inflation is fading, fiscal risk is not

Looking ahead, Pesques believes the dominant macro risks have shifted decisively. Inflation, which defined the period from 2021 to 2023, has given way to fiscal risk as governments expand spending and deficits widen.

“The main risk has shifted very quickly,” he says. “We moved from inflation to fiscal risk, and that means a repricing of term premia because the quality of issuers is deteriorating.”

He points to steepening yield curves as evidence of this transition, with long-dated government bonds absorbing heavy supply even as central banks cut rates at the short end. For active managers, this has created fertile ground for relative-value positioning rather than outright duration bets.

Pesques is also sceptical of the market’s current pessimism on growth, particularly in the US. While acknowledging signs of labour market softening, he believes fiscal stimulus and investment incentives could still surprise to the upside. “To justify more than three or four rate cuts, you need something close to a recession,” he says. “I don’t buy that scenario for the moment.”

This more constructive view explains Amundi’s recent reduction in US duration exposure, particularly at the front end of the curve. “If you don’t think we need more cuts, you need to sell US rates, especially the two-year,” Pesques says.

Despite widespread concern about fiscal dominance and political pressure on central banks, he remains relaxed about institutional integrity. “The independence of the Fed is too important to play with,” he says. “Challenging it would be so costly that nobody really wants to do that.”

For advisers assessing fixed-income allocations in a world of higher volatility and larger deficits, Pesques’ message is stark. Global diversification, intellectual humility and structural flexibility matter more than ever. Fixed income, far from being a passive allocation, is where macro discipline and risk control are tested most brutally.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.