So as we head into 2023, the drivers of return in IG will be that mix of growth and inflation and more specifically, whether we get a recession and if it does occur, the magnitude and the length of that recession.

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If the tightening that we've seen so far through 2022 is enough to moderate inflation, to bring down risk free rates, and also the recession is relatively modest. You're actually looking at a mix of yield and risk that's relatively attractive. If you think about global IG at 5% for six years duration, in an environment where kind of growth slows but doesn't go too negative. That's not a bad set up for the market as we go into 2023.

So there is a quite an interesting opportunity in global IG from a spread perspective as we move into 2023. Remember, inflation isn't necessarily a risk to investment grade, per say, if you have higher inflation, higher costs and higher profits, the value of debt on company balance sheets in real terms actually falls. The concern is that the inflation that we've seen stays high, central banks have to tighten even further, and that causes a deeper recession than is currently priced in, which is probably a very low growth or growth around zero.

So certainly the ECB and the Bank of England won't get to the same peak level of rates as the Federal Reserve. We know that the growth outlook is worse in the eurozone and the UK, owing in large part to increased and elevated energy prices. We also know that those central banks have other things to deal with. So in the case of the ECB, as ever, it has to consider sovereign spreads to bunds as it goes through its tightening cycle and has to manage those risk premia.

And the Bank of England also has to manage a supply side shock in the form of Brexit, which is probably going to dampen growth and maybe keep inflation a little bit elevated. But for all those reasons, we think that, you know, the ECB and the Bank of England will have a lower peak and will probably be earlier in getting to the peak of their of their hiking.

So one sector we like within global IG is utilities. Utilities has the same spread as the wider index most of the time, but it really shows its worth in periods of uncertainty around corporate earnings and growth. So for instance, in 2008 with the financial crisis, 2011, with the eurozone crisis, 2020, with the COVID pandemic, you saw the utility sector as a whole trading maybe 50 or 100 basis points through the rest of the market. As a result, at the end of 2022, we think an overweight to utilities can provide the same spread the same income as the wider market, but will give investors a potential hedge if the economic outlook is worse than the market expects and the market starts questioning the earnings capability of other sectors outside utilities, where in utilities, earnings are regulated are predictable and we have very good visibility on the earnings side.

There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities. 

The views expressed are as of December 2022, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.

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