Fixed Income Outlook: Mar 2021
To fight or not to fight the U.S. Federal Reserve
The phrase "Don't fight the Fed" was first coined by Martin Zweig in the 1970s. Although at that time it was used to illustrate the point that looser monetary policy often precipitates positive equity returns, today it is especially relevant for fixed income markets. As Wednesday's FOMC meeting concluded (17 March), further clarity was provided by Chairman Powell that U.S. monetary policy would remain extremely accommodative despite improved economic/unemployment projections and increased short-term inflation expectations.
These conditions have led to a steepening of the U.S. Treasury yield curve during 2021 and some FOMC members have pulled forward their rate hike expectations since December. That said, the twin goals of maximum employment and price stability remain a long way away. Hopefully the following fixed income outlook papers will provide further aid for investors gauging future expectations.
The ESG Path into Emerging Market Debt (NN IP, 2021)
NN Investment Partners explores some of the challenges faced when integrating ESG principles into the investment process, specifically for emerging market debt portfolios.
Five Reasons to Be Bullish on Local Currency EM Debt (Eaton Vance, Feb 2021)
For compliance reasons, this paper is not accessible in the United States & Canada
Emerging market debt securities have not yet recovered from the events of 2020 to the same extent that developed markets have. On top of this, developed market central banks are likely to remain extremely accommodative which produces a positive macro environment for EM currencies. Eaton Vance details these and other reasons why they are in favour of the EM debt asset class.
Inflation: The devil we knew (Franklin Templeton, Mar 2021)
For compliance reasons, this paper is only accessible in certain geographies
Fiscal stimulus, along with a very accommodative Federal Reserve, and an economy rebounding from 2020 lows could spell an inflation surprise. In light of this and present U.S. yields, Franklin Templeton recommends remaining short duration and exercising selectivity within EM and high yield markets.
Q1: A changing climate in fixed income (Federated Hermes, Feb 2021)
For compliance reasons, this paper is not accessible in the United States
Federated Hermes examines the integration of sustainable investing within fixed income markets, delving into public credit, leveraged loans, ABS, private credit, and other fixed income assets in this 35-page report.
Global Asset Allocation Insight (T. Rowe Price, Mar 2021)
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T. Rowe Price's monthly multi-asset outlook is largely guided by two macro issues: investor concern over inflationary pressures and rising bond yields.
ABS European Insurance Investment Portfolios (M&G Investments, 2020)
For compliance reasons, this paper is only accessible in certain geographies
The authors discuss the attractiveness of asset-backed securities for European insurance investors in light of the EU's new STS framework for asset securitisations.
Keeping it Real: Interpreting higher bond yields (Janus Henderson, Mar 2021)
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Portfolio managers from Janus Henderson expect the Fed and other central banks to remain accommodative, despite significant upward movement in U.S. treasury yields and increased inflation expectations.
Bond Yields: To infinity and beyond? (LGIM, Mar 2021)
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How high could bond yields rise? To find answers, the authors of this brief article look at inflation dynamics, historical inflation surprises, and recent increases in the money supply.
Income Generator: The case for municipal bonds today (Wells Fargo AM, Feb 2021)
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Despite low yields, there's still a market for municipal bonds. Additionally, the taxable equivalent yield of non-taxable munis increases as tax rates rise. Wells Fargo Asset Management looks further into yield and credit analysis in the municipal market.
Central Bank Watcher: Reflation trend is their friend (Robeco, Mar 2021)
Recent moves higher in bond yields may persist longer than expected, especially if near-term inflation coincides with the market's expectations. However, when looking past the next few months, Robeco projects additional opportunities for fixed income investors.
Leveraged Finance: Value as sectors recover (PineBridge Investments, Feb 2021)
Earnings upgrades and improved credit ratings could spawn the next spread compression cycle, but for now most credit sectors are near fair value. PineBridge Investments remains constructive on both high yield and leveraged loan markets due to the improving economic outlook.
Top Three Myths in EM Corporate Bonds Debunked (UBS AM, Mar 2021)
UBS Asset Management attempts to tackle some of the most common misconceptions about the EM corporate bond market and makes the case for further allocations to the asset class.
Leveraged Loan Market Outlook: What will 2021 bring? (M&G Investments, Mar 2021)
For compliance reasons, this paper is only accessible in certain geographies
M&G Investments reviews activity within the leveraged loan market in 2020 and forecasts expectations for 2021. The authors also cover topics such as SPACs, loan demand, refinancing expectations, and macro risk factors.
What Will Be the Key Factors Driving EMD Markets in 2021? (Capital Group)
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Strong global growth this year could lead to credit improvements, more attractive valuations for EM currencies, and higher sovereign debt yields, according to Capital Group strategists.
Distressed Credit and Coronavirus (Man Group, Feb 2021)
Selectivity and geographic flexibility remain key to achieving near-term success in the distressed credit market, according to Man Group portfolio managers.
Tracking ECB’s Communication: Implications for financial markets (Amundi, 2021)
For compliance reasons, this paper is not accessible in the United States
Central bank communication (and efforts to provide forward guidance) can significantly impact the yield curve and market expectations. Here, Amundi Asset Management uses Natural Language Processing (NLP) techniques to analyse ECB communication.
U.S. Leveraged Loans: From trepidation to reflation (PGIM Fixed Income, Feb 2021)
Certain characteristics of leveraged loans, such as floating-rate coupons, may prove beneficial in a reflationary environment. However, PGIM Fixed Income stresses that credit selection remains critical for investors.
ABOUT THE AUTHOR
Andrew Perrins is a former Actuary and Asset Allocator. After qualifying as an Actuary, he worked for 15 years in investment management, serving as Director of Asset Allocation for Abbey Life and for Chase Manhattan, before setting out on a more entrepreneurial path.
To contact him, email [email protected]