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Perspectives

Bond Market Monthly: turn that frown upside down

Kris Xippolitos

By Kris Xippolitos

Head - Fixed Income Strategy

September 20, 2019Posted InFixed Income and Investment Strategy

The growth in negative yielding bonds has changed the global fixed income landscape. Thanks to persistent negative interest policies in Europe and Japan, over 50% of the global bond market (ex-USD) now trades with yields below zero. Though part of the recent rally can be blamed on seasonal illiquidity, market uncertainties around growth and trade have also raised concerns.

Global central bank policy is expected to stay accommodative, as the European Central Bank (ECB) and US Fed cuts policy rates. The newly announced restart of the ECB’s asset purchase program will also add technical support to already low yields. We favor adding duration exposures, despite flat yield curves, preferably in US investment grade corporates and municipal bonds.

Though we are underweight low/negative yielding bonds in our global asset allocation, certain strategies can “turn that frown upside down". With US rate differentials versus non-US markets wide, the cost to hedge US dollar exposure has become expensive. Conversely, hedging some currencies back to USD has cheapened. Using derivative strategies, investors can hedge currency exposures back into USD and potentially generate positive carry. Based on suitability and risk tolerance, these strategies can produce higher yields than what is found in the US bond market.

In this edition, we also discuss the richness on the short-end of the US municipal bond curve, and how the duration of the market has reached historically low levels. We share detailed thoughts on the US high yield bank loan space, while reminding investors that the volatility in Argentina does not paint a wide brush across the emerging markets. Finally, we touch on the US preferred market, where remarkable YTD performance leaves valuations less attractive.

Read the September issue of Bond Market Monthly