4Q 2019: Fixed Income Market Review
With the global “risk-on” switch flipped by early signs of improvement in economic data and corporate performance, 4Q was overall positive for global bonds but pumped the brakes on the major rates-market rally of 2019. The Bloomberg Barclays Global Aggregate Bond Index added 49 basis points during the quarter, wrapping the year with a total return of 6.81%.
The retreat in US Treasuries occurred basically through two shifts in market dynamic. First, in November, against a backdrop of easing trade tensions, modest upward revision of 3Q GDP growth and a slight pickup in domestic manufacturing data, Federal Reserve Chair Powell characterized current monetary policy as “likely to remain appropriate,” leading bond markets to reprice based on expectations of just one additional cut, in 2020. Having edged in October into “normal position” as measured by the 10s2s, the yield curve shifted up slightly but flattened overall during November. In December, however, continued runoff (mostly a function of a pro-risk shift thanks to mounting positives in the outlook for equities and riskier credit) was sufficient to shift up and steepen the curve. The 10s2s – which in August was, briefly and modestly, negative for the first time since 2007 – ended the quarter at 35 basis points, roughly a quarter of its 40-year average.
Retracement further out on the curve set back US aggregate bond performance, which shook out at just 18 basis points on the quarter (thanks largely to a continued drift up in corporates and securitized sectors). The index finished the year up a solid 8.68%, however; even after 4Q’s technical correction the 30-year still rallied 15.67% during 2019, while the 10-year was up 8.68%. Investment-grade corporates – roughly a quarter of the index – saw momentum lost in the highest-quality issues during 4Q but overall contributed generously to US market results, posting total returns of 1.18% in 4Q and 14.48% for the full year. Also roughly a quarter of the index, mortgage-backed securities added 71 basis points in 4Q and 6.33% in 2019.
Developed ex-US sovereigns (a segment of bonds issued in local currency by Japan, Australia, Canada and various European countries) gave back 2% during the quarter, reducing by around 30% the share of global negative-yielding debt from its August peak ($16.8 trillion). While their currencies strengthened vs the dollar, Japan, Germany and the UK saw the biggest upward shifts in yield as improved economic outlook nudged investors out of safe-haven assets and into the arguably underbought equity markets in those countries.
Emerging market sovereigns were the biggest winners globally in 4Q, adding 3.55% and closing out the year up 8.09%. With yields above 5% for both USD-denominated and local-currency issues alike, emerging markets debt was an unsurprising beneficiary in the risk-on mood at the end of the quarter, and local debt benefitted additionally from US dollar weakening.
Index Returns – all shown in US dollars
All returns shown trailing 12/31/2019 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 a moving 30-day average of the 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 a moving 30-day average of the 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
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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.
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