3Q 2019 Fixed Income Market Review
Global yields rose in September as key sovereign rallies partially retraced but with further easing and stimulus, bonds were up for the quarter overall (+0.71% for the Global Aggregate) and led by the US (+2.27% for the US Aggregate). Global fixed income bested global stocks, which – as measured by the MSCI ACWI – added just 10 basis points in USD terms.
The quarter opened with mixed, if largely muted, results for global bonds in July before a strong August showing, as equities sold off in response to escalating trade conflicts and macroeconomic headlines that continue to upset the global growth outlook. Risk-asset investors appeared to weigh the adequacy of a Fed-led global monetary pivot against mounting pressure from various trade skirmishes and structural headwinds globally. In August markets reacted, further, to the US 10-year yield slipping below the 2-year (the first such observation since 2007) and, separately, the Chinese government moving to devalue its currency through lending rate reform, leading the US to label the country a currency manipulator. US treasuries sustained an exceptional run, with the 30-year hitting an all-time closing low (just below 2%) in August before edging back to 2.12% to close the quarter.
Ex-US developed sovereigns posted mixed results country-by-country, with key European issues rallying sharply while the bonds of export-dependent Asian economies struggled from trade war implications and currency impacts. Italy and the UK each were up over 7% in local terms, while Germany and Spain added nearly 2%; on the flipside, The USD strengthened against most currencies, including a devalued Chinese renminbi, struggling Indian rupee, sliding Brazilian Real and free-falling Argentine peso. As in equity markets, dollar strengthening was a headwind across ex-US bond segments for most of the quarter, driving a negative result for emerging sovereigns (-0.73%) and blunting positive returns across major indices and at the country level. Developed ex-US sovereigns overall ultimately posted +2.18% in USD terms. As shown below, 3Q served to expand the share of negative-yielding debt and interest rates globally are now lower than they were in the crisis environment of 2008.
The run persisted for global corporate debt (+1.21%), including US high yield (which added 1.33% for the quarter and posted a positive return even during August’s risk-off environment). Given strong fundamentals and still-substantial yield weighed against a ballooning share of negative-yielding debt among global bond supply, support levels even for the riskiest credit may have been redefined in the intermediate term.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 9/30/2019 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The Barclay’s US Aggregate Index, a broad based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The ICE BofAML Emerging Markets Sovereign Bond Index is a subset of The BofA Merrill Lynch World Sovereign Bond Index excluding all securities with a country of risk that is a member of the FX G10, all Western European countries, and territories of the U.S. and Western European countries. The FX G10 includes all Euro members, the U.S., Japan, the U.K., Canada, Australia, New Zealand, Switzerland, Norway, and Sweden.
- The Bloomberg Barclays Global Aggregate Index, which measures global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
- The S&P Global Developed Sovereign Bond index includes local-currency denominated debt publicly issued by governments in their domestic markets.
- S&P Eurozone Developed Sovereign Bond – seeks to measure the performance of Eurozone government bonds.
- The S&P Pan-Europe Developed Sovereign Bond Index is a comprehensive, market-value-weighted index designed to track the performance of local currency-denominated securities publicly issued by Denmark, Norway, Sweden, Switzerland, the U.K. and developed countries in the Eurozone for their domestic markets.
- ICE BofAML Emerging Markets Sovereign Bond – tracks the performance of US dollar (USD) and Euro denominated emerging markets non-sovereign debt publicly issued within the major domestic and Eurobond markets.
- The Bloomberg Barclay’s US Corporate Bond Index (AA), which measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
- Bloomberg Barclay’s Global Aggregate Securitized- US Mortgage-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and measures investment grade mortgage backed pass-through securities of GNMA, FNMA, and FHLMC.
- Bloomberg Barclay’s Global Aggregate Securitized- US Asset-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and includes the pass-throughs, bullets, and controlled amortization structures of only the senior class of ABS issues.
- The Blomberg Barclay’s US Floating Rate Notes (<5 Yr) Index, measures the performance of U.S dollar-dominated, investment grade floating rate notes with maturities less than 5 years.
- The Bloomberg Barclay’s Municipal Bond Index, which measures investment grade, tax-exempt bonds with a maturity of at least one year.
- The S&P/ LSTA Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
Key Rates are shown for US Treasurys and London Interbank Offered Rate (LIBOR), the interest rate at which banks offer to lend funds (wholesale money) to one another in the international interbank market. LIBOR is a key benchmark rate that reflects how much it costs banks to borrow from each other. “Current” refers to the percentage rate as of 6/30/2018, while the rates of change are stated in basis points.
Credit Spreads shown comprise the Option-Adjusted Spread of the indices indicated, versus the US 10-Year Treasury Yield. “Current” refers to the spread as of 6/30/2018, while the rates of change are stated in basis points.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to fixed income markets.
- 2s10s (bps)/ 10 Yr vs 2 Yr Treasury Spread, which measures the difference between yields on 10-Year Treasury Constant Maturity Securities and 2-Year Treasury Constant Maturity Securities.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- Core Consumer Price Index, which measures the consumer price index excluding food and energy prices. Shown as of the prior month-end.
- Breakeven Inflation: 5 Yr %/ bps, which uses 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
- Breakeven Inflation: 10 Yr %/ bps, which uses 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
This document is intended for informational purposes only and should not be otherwise disseminated to other third parties. Past performance or results should not be taken as an indication or guarantee of future performance or results, and no representation or warranty, express or implied is made regarding future performance or results. This document does not constitute an offer to sell, or a solicitation of an offer to purchase, any security, future or other financial instrument or product. This material is proprietary and being provided on a confidential basis, and may not be reproduced, transferred or distributed in any form without prior written permission from WST. WST reserves the right at any time and without notice to change, amend, or cease publication of the information. This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third party sources and has not been independently verified. It is made available on an “as is” basis without warranty and does not represent the performance of any specific investment strategy.
This material is proprietary and being provided on a confidential basis, and may not be reproduced, transferred or distributed in any form without prior written permission from WST. WST reserves the right at any time and without notice to change, amend, or cease publication of the information. This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third party sources and has not been independently verified. It is made available on an “as is” basis without warranty and does not represent the performance of any specific investment .Some of the information enclosed may represent opinions of WST and are subject to change from time to time and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment strategy. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. Past performance is not necessarily indicative of future results. Securities and services are not FDIC or any other government agency insured – Are not bank guaranteed – May lose Value.
Return to Strategy Filter