Amid all the volatility and hair-raising headlines surrounding markets right now, it’s worth taking a moment to think about the context of all this. Base interest rates in the US since the global financial crisis (GFC), so over the last fourteen years, have only been above 2% for six quarters, and only above 1% for twelve quarters. We entered 2022 with US interest rates at 0.25%, but they’ve ballooned out already this year to 3.25% with the market indicating they could get to 4.50% within six months.

These moves have put a wrecking ball through the global financial system, which has been built since the GFC on the presumption of low interest rates in developed markets, on easy monetary policy more generally, but that liquidity has been pulled away very rapidly. On an annualised basis, money supply in the US has turned negative over the last three months – that’s virtually unprecedented.

Given this, it’s natural for people speculate about which parts of the financial system might be first to break, and when. Chatter is intensifying now, and we’re seeing investors vote with their dollars about whether they have confidence in Credit Suisse’s ability to ride out this storm. But I think there’s tendency for investors to ‘fight the last war’ – during the global financial crisis it was investment banks that were first in the crosshairs, but from a default risk perspective I’m not especially worried about their ability to service their debt, such is the broadly robust state of their capital positions.

With credit spreads so wide, and very limited access to new issues, it does feel like the chances of an accident in credit markets are heightened. One potential source could be the global housing market, as the combination of high leverage and tightening policy is a concerning one for mortgage availability and asset prices. We’ve had a tangible example of this already in the UK, as the major banks pulled their mortgage deals in recent days and brought them back at markedly higher levels.

My investment focus is principally on global sovereign bonds, and in that world the strength of the US dollar is a key issue at the moment – a rising USD is simply the path of least resistance in global currency markets at the moment. A stronger dollar is always going to make life more challenging for emerging market (EM) sovereigns, but what’s interesting this time is that emerging markets are generally in better shape than developed markets. In fact when I look at where opportunities might be found, I think now is the time to be scaling into emerging markets – especially local currency bonds given that in certain countries inflation is now under control.