The most recent monetary policy meetings from the Federal Reserve (Fed) and European Central Bank (ECB) laid the ground work for a new round of interest rate cuts and potential quantitative easing (QE) in Europe. This comes as global central banks are trying to get in front of softening economic data and disappointing inflation measures.
The Fed has highlighted it’s ready and willing to cut rates should data not improve in the near term. The next moves by these central banks is likely the lowering of key benchmark overnight lending rates in an attempt to stoke the economy and stabilize inflation. The markets have taken notice and driven global bond yields to levels not seen since 2016 which has created an abundance of negative yielding securities globally. This has created a tailwind for global government bonds and we see that continuing.
This low rate environment combined with our forecast of slowing yet positive global growth has created a sweet spot for certain areas such as investment grade credit. North American investment grade still provides high quality income in an otherwise low yielding global environment and as a result should see continued demand from both domestic and global investors. We’ve positioned the fund accordingly to take advantage of this with investment grade credit being the largest asset class within the fund.
We’re also finding attractive yield generating ideas within the highest quality, BB-rated segment of the high-yield market and select regions within emerging markets such as Indonesia, Central Europe and the Middle East where fundamentals remain strong and valuations compelling. On the other side of the coin we continue to avoid countries like Turkey, Argentina, and South Africa, as they face challenging fiscal and political situations.
We continue to find good yield-enhancing opportunities within securitized credit as well. Asset-backed and non-agency mortgage bonds remain attractive as both consumer balance sheets and domestic housing remains in good shape. These securities tend to be less correlated to other risk assets and have performed as expected during recent market corrections by outperforming that of other riskier segments and providing added diversification.
With central bank policy as a tailwind for interest rates, we view interest rates staying relatively range bound with a downward bias as inflation readings remain benign. We’ll remain opportunistic on shifting the fund’s duration based on changing trends in growth, inflation, and central bank actions. As such, we continue to position the portfolio to achieve negative correlations to risk assets in times of volatility with a significant portion of the portfolio invested in global government bonds, which tend to perform well in weaker growth environments.
While trade tensions with China may linger, the recent moves by central bank policy makers will offset the negatives created by those trade wars in our view. Should growth slow further from these trade tensions central banks are loaded and ready to pull the trigger on rate cuts. I believe this backstop should continue to prove a positive tailwind for fixed income assets and also enable global governments to have negative correlation to other risk assets.