Monetary Policy Update and Fixed Income Outlook

Outlook for Fixed Income Asset Classes - September 2019

On the monetary policy front, the past month has been rather eventful. The US Federal Reserve cut the fed funds rate again by 25bps, as expected, and the European Central Bank announced a rate cut (to -0.50%), a return to quantitative easing, and an expanded TLTRO program. 

The ripple effects of these two events have been felt throughout global fixed income markets. The following papers provide some additional clarity on the outlook for fixed income asset classes, credit markets, and monetary policy actions. 

Featured Papers

Corporate Leverage Through the Cycle (MFS, Sep 2019)

Lior Jassur of MFS Investments stresses the importance of security selection in corporate bonds, given the mountain of corporate debt that has been issued in the US and Europe and declining overall credit quality.

High loan yields signal a buying opportunity (Eaton Vance, Aug 2019)

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

In this Q&A, Eaton Vance's floating-rate loan team examines the current loan market and highlights an interesting opportunity.

Pricing ESG Risk in Sovereign Credit (Hermes IM, 2019)

Building on a previous Hermes study about ESG performance and credit spreads, this paper attempts to determine is similar relationships exist within the sovereign credit market.

Finding value in emerging market debt (Capital Group, 2019)

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

In this paper, portfolio manager Robert Neithart shares his thoughts on global themes that are affecting emerging market debt.

Fixed Income: Capturing the Opportunity of Constraints (PGIM Fixed Income, 2019)

The fragmentation of fixed income markets leads to opportunities for total-return, multi-sector fixed income investors. PGIM Fixed Income describes some of these relative value opportunities as well as an approach for building multi-sector portfolios.

Fixed Income Asset Classes and Strategies

Illiquidity: understanding the premium in fixed-income markets (Hermes IM blog, 2019)

Can investors turn to illiquid assets in order to boost returns? The authors discuss the liquidity premium and inaccuracies pertaining to its measurement and how it functions.

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

Structured finance is a complex field. The authors look at the evolution of European ABS, discussing everything from post-GFC regulatory changes to present day investment opportunities within the asset class.

An Introduction to Collateralized Loan Obligations (PineBridge, 2019)

In this primer, PineBridge explores how collateralized loan obligations (CLOs) work. They present CLOs as robust, opportunity-rich debt instruments and discuss several of their pros and cons.

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

Are Credit Markets Poised for Dislocation? (PineBridge, Sep 2019)

The authors foresee increased volatility in fixed income markets over the coming quarters and have adapted their asset allocations accordingly.

Q4 2019 Economic Outlook: Learning to live with deflation (Hermes IM)

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

Is a Japanese deflationary environment becoming more likely for certain economies? Living with deflation is possible, although difficult.

Cheap Money in Action (Moody's)

Moody's Weekly Credit Market Outlook provides an overview of recent activity in the corporate bond market and recent economic data releases. This week the featured article discusses an increase in corporate borrowing in the month of September.

What more QE means for Bund yields (Pictet WM, Sep 2019)

Pictet Wealth Management examines the ECB's recent stimulus and their forecast for 10-year Bund yields.

Monetary Policy Outlook

The Fed cuts rates amid low inflation. What’s keeping it down? (Capital Group blog, Sep 2019)

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

Capital Group reviews recent US monetary policy decisions, including the most recent interest rate cut. But why is it that inflation has remained so low?

Forecasting the Next Recession: Will rate cuts be enough? (Guggenheim, Sep 2019)

Guggenheim reviews their economic model for forthcoming recessions. A tipping point may exist where a recession is unavoidable.

An Apt Place and an Awkward Time for the Fed (Mellon Capital, Sep 2019)

Mellon Capital Chief Economist Vincent Reinhart considers the Fed's likely path for the rest of 2019.

Central Bank Watcher: To Infinity and Beyond (Robeco, Sep 2019)

Robeco's monthly report looks at recent policy actions of central banks across the globe, as well as an overview of the macro outlook, inflation, and growth expectations.

Emerging Markets Debt

The importance of positive yield: why Asian fixed income makes sense in the face of rising uncertainty (Manulife IM, Sep 2019)

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

Are traditional safe haven bonds and other negative yielding assets the only places to turn to in a risk-off environment?

Challenges and Solutions to the Cost of Investing in EM Local Debt (PGIM Fixed Income, Sep 2019)

Investing in EM local bonds can incur extra transaction costs, which reduce the amount of alpha generated in excess of local bond indices. This paper discusses the mitigation (or possibly the elimination) of these issues.

Why EM Corporate Debt Deserves a Place in Your Portfolio (AB blog, Sep 2019)

For compliance reasons, this paper is only accessible in North America and South America

Many investors may be mistakenly underexposed to emerging-market corporate bonds. The authors explain the importance of EM corporate debt allocations for asset allocators.