July 2019 Fixed Income Outlook: Japanification?

Preparing for a return to looser U.S. monetary policy

Last week, J.P. Morgan's CIO suggested that the yield on U.S. 10-year treasuries may very well fall to zero within the next few years.  This would be an unprecedented circumstance for the U.S. bond market.  Yet with a Fed Funds rate cut of 25-50bps expected at the upcoming FOMC meeting, this will mark a return to a looser, stimulative monetary policy regime in the United States.  Some fear that it may also be the first step along a slippery slope towards a very Japanese-looking future.

Meanwhile, in Europe, Mario Draghi has recently indicated that there is still scope to expand the ECB's QE program, as many European economies struggle to induce inflation.  Looking at historical yields, the European bond market seems to already be converging towards a Japanese scenario.  Is this the future for bond markets across the board?  Hopefully, the below list of fixed income outlook papers will provide some answers.  

Quarterly Outlook (PGIM Fixed Income, Jul 2019)

PGIM Fixed Income's Q3 Outlook contains updates on regional factors that are affecting the economic outlook across the globe, as well as expectations for fixed income markets in a quarter beset with both low growth and low inflation.

Global Fixed Income Strategy (Invesco, Jul 2019)

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

This 23-page paper provides important insights into the outlook for global fixed income markets from Invesco.

Five reasons investors are turning to EM corp bonds (Franklin Templeton, Jul 2019)

For compliance reasons, this paper is only accessible in the EMEA region

Corporate bonds in emerging markets have been attracting investors due to their risk/return profiles, low correlations with other fixed income assets, and several other reasons.

Economic Outlook Q3 2019: Japanification (Hermes IM)

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

Hermes Investment management presents their economic outlook for Q3, paying extra attention to monetary policy within the USA, Japan, the Eurozone, and China.

Are the Eurozone and ECB turning Japanese…? (FTSE Russell blog, Jul 2019)

FTSE Russell discusses the differences and similarities between the ECB's asset purchase program (and the scope for expansion of that program) and the BoJ's experience with QE.

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.

House View Q3 2019 (Aviva Investors)

For compliance reasons, this paper is only accessible in certain geographies

This quarterly House View document from Aviva Investors is a compilation of views and analysis from the firm's major investment teams.

The yield curve is not a ‘super-forecaster’ of recessions (BNP Paribas AM, 2019)

According to BNP Paribas Asset Management, one should be skeptical of the claim that the yield curve is a 'super-forecaster' or recessions.

Investment Insights: Mixed Messages and Forest Fires (MFS IM, Jul 2019)

Expectations that monetary policy will extend the cycle are creating cheap financing for businesses, some of which are poor investments.

U.S. Corporate Bonds: Where Has My Credit Premium Gone? (Mellon Capital, 2019)

Mellon Capital asks the question - Is the credit risk premium a better risk measure than the option-adjusted spread for corporate bonds?

Fixed Income Outlook: More repression to avoid recession (Robeco, Jul 2019)

This latest edition of Robeco's Fixed Income Quarterly examines whether the global economy will recover and what the likely impact on fixed income assets might be.

2019 mid-year outlook - Asian fixed income (Manulife IM)

For compliance reasons, this paper is only accessible in the EMEA region

Despite the strong performance in H1 2019, further opportunities in Asian fixed income could arise in H2, given the volatile macroeconomic backdrop.

Fixed Income Monthly (Fidelity International, Jul 2019)

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

The Fixed Income Monthly document from Fidelity International gives a birds eye view of the fixed income team's medium term viewpoints on credit, rates, and the outlook for the global economy.

Quarterly Outlook: The downside of low rates and Fed easing (Eaton Vance, 2019)

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

Eaton Vance examines the potential downside of a rate cut decision by the FOMC later this month.

The credit cycle: is there still room to run? (Manulife IM, Jun 2019)

For compliance reasons, this paper is only accessible in the EMEA region

Although the current expansion may still have legs, credit investors may wish to take a more cautious stance, given recent market volatility, by paying closer attention to duration, interest rate risk, liquidity risk, and international diversification.

Time to Dust Off the Playbook for Easing? Fixed Income Q3 2019 (Neuberger Berman)

For compliance reasons, this paper is only accessible in certain geographies

Neuberger Berman's Q3 fixed income outlook advocates a cautious but risk on approach, given supportive central banks and the tailwind that easing once again would likely provide.

A Fed Rate Cut Has Balanced Implications for Credit Spreads (PineBridge, Jul 2019)

In this Fixed Income Asset Allocation Insights paper from PineBridge, the authors surmise that a rate cut by the US Fed later this month could lead to a short-term rally in risk assets. This being said, trade tensions and potential economic fatigue remain the dominant themes for H2 2019.

DEMOGRAPHIC MEGATRENDS

The enduring link between demography and inflation (BIS, 2018)

Contrary to the prevailing tide, the authors provide evidence that an aging global population is associated with higher real interest rates, higher inflation and higher wage growth. The paper suggests that we should expect an era of rising inflation, reversing a trend that has been effect for several decades.

Demographics, Inflation and Asset Prices (Goldman Sachs AM, 2018)

Goldman Sachs examines the complex relationship between demography, inflation and asset pricing, discussing recent demographic developments and building long-term economic forecasts from their demogrpahic methodology.

Megatrends: The economics of a graying world (Vanguard, 2019)

What affect will the ageing of global population have on economic activity? As part of their megatrends series, the Vanguard economics team explores the muting effect on GDP growth and examines the investment implications.