What could billions of repatriated dollars mean for bonds?
Tax reform has incentivized companies to return their offshore cash to the U.S. This could create opportunities for U.S. investment grade bonds.
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Tax reform has incentivized companies to return their offshore cash to the U.S. This could create opportunities for U.S. investment grade bonds.
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I’ve been warning for some time about the economic dangers of protectionism and the potential for retaliatory policies that could stifle free trade. Last week, this threat intensified – and that was just the tip of the iceberg in a week filled with market-moving news. Below I highlight five critical headlines from last week and preview what’s ahead.
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Geo-politics is back in the spotlight, with German Chancellor Angela Merkel finally securing a governing coalition after nearly six months of uncertainty, while Italy embarks on its own period of uncertainty, given the inconclusive results of its election this past weekend. Italy’s voters are following in the recent footsteps of voters in the United Kingdom, the United States, Germany and elsewhere – questioning the “status quo.”
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Markets took another roller coaster ride last week. The yield on the 10-year U.S. Treasury bond rose to 2.95% – a level it hasn’t seen in four years – but then moved lower by the end of the week.1 Stocks also vacillated, largely in response to those Treasury yield movements. It appears that markets are unsettled and primed to react to the news of the day – both negatively and positively. Below, I discuss five upcoming events that could possibly be the catalyst for more moves ahead.
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Last week brought renewed focus to three areas of concern that I’ve been writing about for some time: populism, protectionism and pressure on debtors. It appears that we may be moving closer to certain outcomes that could be of concern to markets.
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Stocks globally have experienced more than a week of tumultuous trading, with the U.S. stock market officially in correction territory. And after being relatively sedate for years, the VIX Index has risen dramatically in recent days, indicating rising volatility. Stocks have moved so far so fast that investors have experienced financial whiplash and are trying to understand what caused markets to change course so abruptly. To put it simply, almost everything that should be a positive for stocks is now a negative for stocks.
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Employment growth has been strong enough that the Bank of Canada (BOC) hiked its overnight target rate to 1.25% in January.1 The BOC statement attempted to balance the view that growth was near capacity with concerns that raising rates too quickly could cause the economic expansion to stall. The 10-year yield has broken through its previous peak of 2.15% on the growth story and a modest pickup in inflation.2 We believe yields should continue to move higher from these levels.
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Market expectations of inflation have risen in recent days, after signs of wage growth – often seen as a harbinger of inflation – appeared in the January jobs report. We at Invesco Fixed Income believe investor concerns that inflation is finally showing signs of life have helped drive interest rates higher and impacted credit markets, where worries over higher interest rates (and their potential impact on companies) have caused declines in stock markets and other risky assets.1
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In my recent blog on the impact of the tax reform, I explained why I believe the new tax law should be extremely supportive of the U.S. investment grade (IG) bond market, including provisions that could lead to reduced supply. Looking beyond IG, the news appears to look good for other fixed income sectors as well.
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Last week ended on a bad note. The yield on the 10-year Treasury moved up from 2.695% to 2.852% in just five days,1 spiking on the release of the U.S. employment situation report for the month of January. Not only did yields globally then rise, but this brought on the biggest sell-off in U.S. stocks in nearly two years – which then spread to Europe and Asia, putting downward pressure on equities in those regions. As I write this, futures suggest an extension of the sell-off today.
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2017 marked only the second time in the last eight years that international markets outperformed the U.S., with the MSCI All Country World Index (ACWI) ex-U.S. returning 27.19%, and the S&P 500 Index returning 21.83%.1 So is this the beginning of a sustained shift in outperformance? On one hand, there is a list of risks facing international markets, from Brexit to a potential slowdown in China. But on the other hand, international companies have recently been trading at a substantial valuation discount compared with the U.S., and we have been seeing strong profit expansion.
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Last week offered some stark reminders that we live in a very global and interconnected world. Given how interwoven our international relationships have become, the current trend toward de-globalization carries with it many consequences — and protectionism could become the biggest economic risk of them all.
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This time last year, the Invesco International and Global Growth team was optimistic about the better relative earnings potential that we saw building in Europe. Indeed, the trends played out to our benefit over the course of 2017.
For the past year, I’ve been talking about disruption as a key theme for the markets and economy. During the past week – with the shutdown of the U.S. government, continued efforts to form a coalition in Germany, and an Olympic agreement coming out of the Korean peninsula – it’s become clear that the theme of disruption remains front and center. Particularly geopolitical disruption.
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Often investors become concerned about duration in a bond portfolio, believing that if interest rates rise, duration will increase the potential for losses.
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The Bank of Canada (BoC) announced today it was raising the target overnight rate by 0.25% to 1.25%. The last time the BoC hiked its target rate was at the September 6 meeting. Market expectations for this rate hike began to increase several weeks ago, so it was almost fully priced into the market.
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In a number of places around the world, it’s an exciting time to be a taxpayer — or tax attorney. That’s because a variety of countries have brought or are bringing tax cuts to fruition.
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Despite the near non-stop drama of the legislative process, we ended December with the U.S. Tax Cut and Jobs Act of 2017 being signed into law. What does this mean for fixed income investors? In my opinion, the news is overwhelmingly positive for the U.S. investment grade market; here are four reasons why.
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Last week saw the release of the latest U.S. employment report, with just 148,000 nonfarm payrolls created in December.1 This was significantly below expectations and the previous month’s reading. However, it may have been a Goldilocks jobs report: It is good enough to stave off any concerns that the economy may be weakening, but it’s not strong enough to suggest that the economy is overheating.
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For income-focused investors, yield remains incredibly elusive in most markets, with roughly 20% of global fixed income assets delivering negative yield. In Europe, that rises to about 40%.
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