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Fixed Income - Bonds are Expensive!

By: Andrew Perrins, Chief Executive |
21 Aug 2019
Updated 27 Aug 2019

Outlook for Fixed Income Asset Classes - August 2019

As Cliff Asness states, "Bonds are frickin' expensive!" Last week, the yield differential between the US 10-year treasury note and the 2-year treasury note inverted for the first time since 2007, and the yield on the 30-year Treasury bond reached an all-time low. As yields vary inversely to the prices of these securities, many US bonds are currently trading at expensive levels.

This may seem extreme, but the situation pales in comparison to Europe, where there is over USD 14 trillion (par value) of bonds currently outstanding with negative yields. What is a global fixed income investor to do in this situation, and what are the outlooks for specific fixed income asset classes like corporate credit, high yield, and emerging market debt? We hope these papers will provide some answers.

FEATURED PAPERS

Rehabilitation of the European Structured Finance Market (BNP Paribas AM, Jul 2019)

European ABS may be appealing to investors at present, considering the market's evolution from both a regulatory and a strategic standpoint.

U.S. Munis Outlook: The Downside of Low Rates and Fed Easing (Eaton Vance, Jul 2019)

For compliance reasons, this paper is NOT accessible in the United States and Canada

What are the potential downsides of lower rates for U.S. municipal bond investors? This issue is all the more relevant, given the recent Fed Funds rate cut and the declining yields that have followed.

EM Debt: The missing piece of the cashflow puzzle (LGIM, Jul 2019)

For compliance reasons, this paper is NOT accessible in the United States and Canada

What role does emerging market fixed income have to play in the design and management of cashflow matching strategies for insurance companies and pension schemes?

ETFs: A Primary Means of Obtaining Fixed Income Exposure (BlackRock, 2019)

For compliance reasons, this paper is only accessible in the United States

As a part of its 9th annual US ETF Study, Greenwich Associates interviewed 181 institutional investors on the utility of ETFs for portfolio construction purposes, finding that ETFs are now considered as a primary means of obtaining fixed income exposures within institutional portfolios. Liquidity, ease of use, speed of access, and low management fees are some of the top reasons for using bond ETFs.

FIXED INCOME OUTLOOK

Bonds Are Frickin' Expensive! (Cliff Asness, Aug 2019)

U.S. bond yields are in some cases near historical extremes. In this brief note, Cliff Asness looks at the relationship between bond yields, the slope of the US Treasury yield curve, and economic conditions.

360° – Fixed Income report, Q3 2019 (Hermes IM)

For compliance reasons, this paper is NOT accessible in the United States

Andrew Jackson, Head of Fixed Income at Hermes, and his team present their Q3 outlook of risks and opportunities for public and private debt markets, structured securities, leveraged loans, and asset-based lending.

Fixed Income Monthly (Fidelity Intl, Aug 2019)

For compliance reasons, this paper is only accessible in the UK & Europe

The Fixed Income Monthly provides a forward-looking summary of the medium-term views from the Fidelity Fixed Income team.

A Low Yield World (GSAM, Aug 2019)

Can investing in debt with low or negative yields still generate positive returns? This paper lays out some active strategies for global fixed income investors.

CORPORATE CREDIT

Lowest Investment-Grade Industrial Company Bond Yields since 1956 (Moody's)

The authors consider the latest rally by Treasury bonds. Yields for investment grade corporate bonds in the industrial sector have now fallen to levels not seen in 63 years.

**Edward Altman: Where Are We in the Credit Cycle?* (Enterprising Investor blog, Aug 2019)**

Edward Altman discusses whether the 'new momentum' within the credit market bubble.

Traditional and Alternative Factors in Investment Grade Corporate Bond Investing (Amundi AM, 2019)

For compliance reasons, this paper is NOT accessible in the United States

This paper looks at both traditional factors (size, value, bets, momentum, and quality) as well as alternative risk premia and their potential applications within the investment grade corporate bond market.

HIGH YIELD

Fallen Angel Bonds: The Last Free Lunch (Mellon, Aug 2019)

Fallen angels (IG credits that have been downgraded to HY) may benefit from market mechanisms that increase alpha opportunities, as opposed to arbitraging them away. Could this be the last free lunch for investors?

Seek high yield opportunities, but be aware of liquidity conditions (Amundi AM, Aug 2019)

For compliance reasons, this paper is NOT accessible in the United States

This paper by Amundi AM provides important insights into current high yield investment opportunities.

Podcast: sub-zero high yield (Hermes IM, Jul 2019)

For compliance reasons, this paper is NOT accessible in the United States

There are now over USD 14 trillion of negative-yielding bonds outstanding and there are even some negative-yielding high yield bonds. Experts at Hermes Investment Management discuss this unique circumstance.

DISTRESSED DEBT

The Anatomy of Distressed Debt Markets (Ed Altman and Robert Benhenni, 2018)

Ed Altman and Robert Benhenni discuss distressed debt markets. For a long time this market was the domain solely of hedge funds alternative asset institutions, but this could be changing as the distressed debt market continues to mature and become more mainstream.

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