The era of zero interest rates has come to an end. Since late 2021, central banks have been hiking rates to rein in above-target inflation: developing economy policy-makers by an average of around 650 basis points, and 400bp in advanced economies. This also marked a shift in the effect of monetary policy on reserve management. 

Bonds became more appealing as yields rose. But they also came with the risk of devaluation as inflation persisted and rates rose higher. Meanwhile, fixed income returns are eroded by inflation. 

Reserve managers discuss how their fixed income asset allocations have changed since 2021. They reveal whether they reconfigured their currency distributions and durations, and how they are thinking about the effect of inflation on reserves.

Banxico’s Gerardo García speaks in-depth on reserve risks “after a series of unprecedented events”. As well as inflation, he offers insights on investment policy at a time of heightened market volatility and war. This period “calls for humility around how much we think we know and understand about potential future developments”. García also talks about fixed income investments outside of US Treasuries and use of derivatives to manage rate differentials. 

Should reserve managers diversify when rates are high? Panellists agreed there are opportunities in emerging market economies, particularly larger, more liquid ones. Officials talked about strategic asset allocation governance and how different risk tolerance levels can be set for working capital, liquidity and investment tranches. Tactical asset allocation can be used as a “laboratory for new asset classes”. 

In Fixed income factor portfolios for institutional investors, reserve managers are presented with metrics to evaluate this quant strategy for entry into the corporate bond market.

Investment policies pivot on whether we have reached terminal rates. In A turning point for reserve managers? the World Bank’s Marco Ruiz highlights that the cost of carry for some countries is higher than usual. After global reserves declined in 2022, some central banks may be hesitant to increase their levels of reserves, though in some cases they may need to, says Ruiz. 

This report highlights decision-making frameworks and investment policies used by reserve managers worldwide. It focuses on fixed income allocations and contextualises them in the events shaping the global financial landscape. We endeavour to equip reserve managers with the benefits of knowledge-sharing to position themselves to meet the demands of the new era. As the past few years have shown us, uncertainty is the only certainty.

Download the 2023 focus report in PDF format