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Nobody puts bonds in the corner

Kris Xippolitos

By Kris Xippolitos

Head - Fixed Income Strategy

February 10, 2020Posted InFixed Income and Investment Strategy

  • Equity and fixed income markets are clearly telling two different stories. Equities seem to reflect a strong consumer, the de-escalation of trade threats and a solid earnings outlook. While bond markets reflect negative interest rate policies, central bank asset purchases, weak manufacturing, and concerns over the economic impact of the Chinese coronavirus. Over the last 6 months global equities have gained 13%, while global bond yields remain relatively unchanged. 
  • Though the US economy appears on solid ground, the US Treasury (UST) market has been forced to follow global affairs. However, if we follow the path of the 2003 SARS crisis, market reactions around the coronavirus could prove temporary. This would imply a reversal of flight-to-quality flows, with interest rates moving higher once again. 
  • Lower UST yields have benefitted higher quality bonds. After an exceptional 2019 for US investment grade corporates, momentum has spilled over into the New Year. Valuations are expensive, especially in shorter maturities, but value remains in longer-dated bonds. US muncipals (for US investors) have been historically expensive, especially in shorter-dated bonds. In some instances, taxable corporates make more sense. We revise down our muni view to neutral from overweight. 
  • US and European high yield bank loans have started 2020 well, with both regions outperforming their respective high yield bond markets. We maintain our conviction in bank loans, as yields are higher than HY bonds, price volatility is lower and negative media attention is overstated. We also continue to favor non-agency residential mortgage-backed securities, though we are becoming more wary about historically high valuations in US and European preferred stock markets.

Read the February issue of Bond Market Monthly