Fixed Income outlook
Sovereign bond yields have been pushed lower around the globe as investors seek safe-haven investments, with volatility and uncertainty keeping yields as low as they are. It is likely that sovereign bonds (with some high risk exceptions) will not be providing attractive yields or returns over the medium term.
In some markets, government bond yields have not been this low for decades – Germany’s 10-year bond yield is currently around 0.34% and Japan’s slightly higher at 0.41%. It is hard to imagine yields going lower from here – but note that German yields are negative out to the 5-year maturity point.
Only in the US have sovereign yields come off their lows. The US economy is one of the few beacons of recovery in a world where the near-term growth outlook has become more downbeat. The labour market continues to improve and there are tentative signs that real wages growth could accelerate, providing workers with more discretionary income. The collapse in the oil price and subsequent fall in pump petrol prices are providing a boost to consumer discretionary incomes as well as downdraft to inflation.
In contrast, the malaise in Europe continues, with the added uncertainty of the Greek election, with the new government now seeking significant concessions from its creditors. UK growth momentum has stalled and Japan remains mired in recession despite the massive stimulus provided by Abenomics. The collapse in commodity prices has taken a toll on Australian growth.
Monetary Policy
Monetary easing, stimulus, accommodation, call it what you will, remains the game of the day. The slowing growth trend and fears of deflation, compounded by weak commodity prices, has prompted a new burst of easing, of both traditional and unconventional means. Most of these (outside of ECB’s new QE program) were a surprise to markets in terms of timing.
A few recent examples:
· Jan 14th Reserve Bank of India cuts policy rate by 0.25% from 8.00% to 7.75%
· Jan 22nd Bank of Canada cuts policy rate by 0.25% from 1.00% to 0.75%
· Jan 23rd ECB announces a bold new asset purchase program (let’s call it QE) amounting to approximately 1.1 trillion Euro and running at a pace of 60 billion Euro per month
· Feb 3rd Reserve Bank of Australia cuts policy rate by 0.25% from 2.50% to 2.25%
Cash rates are effectively zero or close to zero in many parts of the developed world and are likely to stay that way for some time. These policy settings reflect the difficulties authorities worldwide are having in re-igniting growth momentum post the GFC and in the face of an enormous debt burden.
Credit markets
Investment grade, high-yield and emerging-market spreads have all widened given the volatility and uncertainty in global markets referenced. These spreads have re-bounded over recent days, showing that there remains buying demand whenever there is a pause in the “bad news” surrounding geopolitics and debt discussions. Current levels are modestly higher than long-term averages and investors remain yield hungry which will see some continued support in these credit markets. The risks may be somewhat higher than recent times, but for now, the lights are “greenish-amber” rather than flashing red.
SQM’s new role
With SQM Research’s expansion into fixed income and alternatives ratings, we are expecting to release our first fixed income review at the end of the first quarter or the beginning of the second quarter of 2015. We are delighted to have had such a positive response from fixed income managers, with many enthusiastic to start using our service. We greatly appreciate the support we have received from advisers, both our existing subscribers and those who are new to our research and have signed up to our research recently.
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