From Bond Vigilantes, Jan. 3:
The new year has started with a blunt reminder of probably everything
that investors wanted to forget over the holiday season: economic data
is worsening while the oil price continues to fall, dragging down
equities and the most equity-like fixed income asset classes.
Traditional safe-havens continue to rally, as they did in 2018.
The year left behind ended far worse than it started: after a
strong-growth 2017, where most fixed income sectors delivered positive
returns, last year’s early hopes quickly sank with the escalation of the
US-China trade war and the Italian elections in May, which raised
questions about the future of the European Union (EU). Fears of a hard
Brexit also weighed on the continent’s economic prospects, lifting
credit spreads above those in the US for the first time in years. China
continued its slowdown, while in the US, optimism started to fade as
interest rates rose, economic data disappointed and oil plunged to less
than $50 per barrel amid forecasts of weak demand. US corporate earnings
projections were also reduced as the effects of the recent tax cuts
started to decline. The world benchmark US 10-year Treasury yield, which
reached a 7-year high of 3.2% last year, changed gear after the
Democrats won control of the House of Representatives in the November
mid-term elections. Investors believed that their victory reduces the
chances of further tax incentives from President Trump. The 10-yr
Treasury yield has been on a continuous slide since, ending 2018 at
2.66%.
Despite the pessimism, almost one third of the 100 fixed income asset
classes tracked by Panoramic Weekly delivered positive returns last
year, led by traditional safe-havens, such as German bunds and US
Treasuries. With global growth slowing down and global debt reaching a whopping 225% of world GDP,
investors are betting some central banks may have to rein in their rate
hike projections – offering more support to bond prices. US Federal
Reserve Chairman Jerome Powell already did in December – the Fed now
sees 2 rate hikes this year, instead of 3. The M&G Panoramic Weekly
team wishes you a very happy new year.
Heading up:
Safe-havens – the best of times in the worst of times:
US Treasuries, European government bonds and Japan’s sovereign debt did
in 2018 what they usually do: deliver positive returns, rain or shine.
While corporate debt markets and developing nations suffered from higher
interest rates, a stronger dollar, the ongoing trade wars and lower
global economic growth, traditional safe-havens remained solid.
Treasuries have only posted negative returns in 2 of the past 18 years
(2009 and 2013), while European and Japanese government bonds have only
missed 1 year of positive returns (2006 and 2003, respectively), over
the same period. Sovereign bonds have been favoured by protracted global
low inflation, a backdrop that may continue going forward given the
recent plunge in oil prices. Weaker growth and rising global debt may
also refrain central banks from tighter monetary policies: out of 19
major economic areas, 5 are projecting lower rates in 3 years’ time (the
US, Mexico, the Czech Republic, Japan and Korea), compared to none
barely 2 months ago, according to Bloomberg data. In terms of
currencies, safe-havens have also outperformed, mainly the US dollar and
the yen. As Dickens would have put it, for safe-havens, it was (is?)
the best of times, it was (is) the worst of times; it was the age of
wisdom, it was the age of foolishness…
China government bonds and loose policy – odd one out:
China’s USD-denominated sovereign debt returned 3.8% to investors in
2018, the third best performer among the 100 fixed income asset classes
tracked by Panoramic Weekly. The rise comes despite a slowdown in
economic growth, now down to an annualised pace of 6.5%, from 6.9% last
year. The country’s manufacturing PMI dropped to 49.4 in December, the
weakest since 2016 and below the 50 level that marks a contraction. Yet,
the Chinese government’s stimulus policies, including cuts in the
banks’ reserve requirements, continue to support the economy and the
bond market. Still mostly in the hands of local investors, Chinese debt
is increasingly available to foreign holders via the Bond Connect
programme, and may be more in demand after it is included in some
Bloomberg Barclays benchmark indices from April this year. In the
present global rate rising environment, investors welcome a country with
an overall easing policy.
Heading down:
Business cycle – down-sloping? With the last
recession now a decade ago and economic theory suggesting that cycles
tend to last about 10 years, investors are understandably concerned –
hence their preference for safe-havens over risk assets....
...
MUCH MORE
