Toby Watson on the Structural Shifts Reshaping Global Fixed Income Markets
Global fixed income markets have undergone more change in the past five years than in the preceding two decades — and Toby Watson brings to this subject a perspective shaped by long experience of navigating credit and structured finance across multiple market cycles.
Fixed income has long been the cornerstone of institutional portfolio construction, valued for its income generation and role as a diversifier against equity risk. Yet, the structural environment in which fixed income operates has shifted significantly — and the assumptions that underpinned allocation decisions for much of the post-2008 era no longer apply in the same way. Toby Watson, whose career spans structured credit, global principal funding and investment management across multiple rate cycles, offers a considered perspective on what these structural shifts mean for investors thinking seriously about fixed income today.
A Market Transformed: The End of the Low-Rate Era
For much of the period between 2009 and 2021, global fixed income markets operated in a highly unusual environment. Interest rates across most major developed markets were at or near historic lows. Central bank asset purchase programmes compressed yields across the credit spectrum, pushing investors progressively further along the risk curve.
That environment shaped a generation of fixed income allocation decisions optimised for conditions that no longer prevail. When central banks pivoted sharply to tightening from 2022 onwards, the consequences were significant. Long-duration bonds fell sharply. The correlation between equities and bonds — reliably negative for much of the preceding two decades — turned positive as both asset classes fell simultaneously. For Toby Watson, this episode underscored a principle worth internalising: structural environments in fixed income markets can and do change, and portfolios built for one environment may be poorly positioned for another.
What Do These Structural Shifts Mean for Fixed Income Allocation?
The most important implication is that the framework investors used during the low-rate era needs updating. Toby Watson, whose career at Goldman Sachs gave him experience of fixed income and credit markets across very different structural environments, would suggest the starting point is a clear-eyed reassessment of the role fixed income is actually playing in a portfolio — and whether the assumptions embedded in that allocation still hold. For Toby Watson, that kind of periodic reassessment is a basic discipline of sound portfolio management.
Toby Watson on the Key Structural Forces at Work
Several structural forces are reshaping global fixed income markets simultaneously, and understanding their interactions is important context for thinking clearly about allocation.
One of the more significant changes has been the return of positive real yields across much of the developed market sovereign bond universe. For much of the post-2008 era, real yields were negative — investors in government bonds were accepting a guaranteed erosion of purchasing power. The return of meaningfully positive real yields restores some of the income-generating and capital preservation characteristics that made fixed income a cornerstone of institutional portfolios in previous decades. Toby Watson would note that this shift changes the calculus for fixed income allocation considerably — making certain parts of the market genuinely attractive again in a way they were not during the low-rate years.
The unprecedented expansion of central bank balance sheets through quantitative easing — and the subsequent process of balance sheet reduction — has introduced a significant influence on sovereign bond pricing. When central banks are large buyers of government bonds, they compress yields and reduce the price discovery function of the market. As they reduce their holdings, that support is withdrawn. Toby Watson’s experience at Goldman Sachs, working across structured finance and credit markets where understanding the technical drivers of pricing is central to investment analysis, gives him a grounded appreciation of how central bank balance sheet dynamics affect the fixed income landscape.
Practical Implications for Fixed Income Investors
The structural shifts reshaping fixed income markets have a range of practical implications. Among the most important are:
- Duration management — the appropriate level of interest rate sensitivity in a fixed income portfolio depends critically on the structural rate environment, and the case for extending duration looks very different when rates are structurally higher than it did in a falling-rate world
- The reassessment of the diversification role of fixed income — the reliably negative correlation between equities and bonds that characterised the low-rate era cannot be assumed to persist, and portfolios that depend on it for risk management deserve careful scrutiny
For Toby Watson, these implications point towards a more active and explicit approach to fixed income allocation — one that starts from a clear view of the current structural environment rather than assumptions carried over from a different one.
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For long-term investors, the most valuable response to structural change in fixed income is not to abandon the asset class, but to engage with it more carefully. Among the disciplines that tend to matter most are:
- A clear distinction between the income-generating and capital preservation roles of fixed income — which may be best served by different instruments and different parts of the yield curve
- Regular reassessment of the structural assumptions embedded in fixed income allocations, rather than allowing decisions made in a different rate environment to persist unchanged through inertia
Toby Watson — whose career at Goldman Sachs and subsequent work at Rampart Capital as a partner have given him experience of fixed income markets across genuinely different structural environments — would frame the central point simply: the fixed income landscape has changed, and the frameworks used to navigate it need to change with it. For Toby Watson, that is not a reason for alarm. It is a reason for careful, clear-eyed thinking about what fixed income can and cannot offer in the environment that actually exists today.
