The markets have been pretty vulnerable over the last few months, but they’ve started to settle down over the past month and a half. I believe a lot of the credit for this lies with incredible liquidity provided by central banks around the world.
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The spread of COVID-19 has created unprecedented market turmoil. While the equity space garners the most headline attention, it’s been a very volatile time for the fixed income markets, particularly within the investment-grade space. In fact, over the last few weeks, we’ve witnessed six out of the 10 largest one-day moves in history.
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As yields across the globe plummet, many investors are now actually paying someone to take their money. Currently, there are more than US$12 trillion of bonds with negative yields outstanding which equal 24% of the global bond market.1 In Europe, the search for positive yield is especially challenging. Over half (51%) of the European bond market now yields a negative rate.1 Germany recently issued €5 billion of bunds at a price of €101.5, but these will only return €100 in two years with zero coupons paid.2 And according to Reuters, Austria is also rumoured to be planning to issue a 100-year bond at roughly 1% to feed yield-hungry investors.
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The Federal Reserve (Fed) is almost certainly going to raise interest rates in December, but what’s less certain is what comes after that – will 2019 see three rate increases or four?
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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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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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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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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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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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The Federal Open Market Committee (the Fed) is set to convene its final meeting for 2017. It promises to be the event the markets have been waiting for since 2008.
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