Your browser does not support JavaScript! Pls enable JavaScript and try again.

Fixed Income

Stocks Go Up, Bond Prices Go… Up?

Posted on

Trade uncertainties and a synchronized dovish shift in central bank policies are themes that are expected to affect markets for some time, keeping pressure on core interest rates.

  • Long duration, high quality bonds have managed to generate close to equity-like returns thus far this year. Lingering market uncertainties surrounding trade, along with dovish central banks, are likely to keep pressure on longer-term rates.

 

 

  • US: The Federal Reserve has cut rates by 25bp at their July 31 meeting, leaving the door open to additional action. Historically, fixed income markets tend to perform well during periods of Fed easing, thus Citi analysts overweight high quality US corporates and US Treasury debt (UST).

 

  • Europe: Expected policy action by the European Central Bank (ECB) to cut rates later this year and a potential restart of their asset purchase program (APP) are likely to weigh on net supply. As it is, 80% of the world’s bond market (ex-US) already trades with a yield less than 1%. Citi analysts remain cautious on European Investment Grade (IG) bonds while being neutral on High Yield (HY) bonds as spreads are susceptible to a weakening economic outlook and Brexit uncertainty. That said, the possibility of a new round of Corporate Sector Purchase Programme (CSPP) may be beneficial and push spreads even tighter.

 

  • Emerging Markets: Citi analysts see propensity for Asian central banks to ease further, leading investors to heighten their focus on yield enhancement strategies. Asia USD bonds are expected to provide stable returns coupled with higher yields relative to their developed markets counterparts. In particular, Asian high yield (HY) bonds appear to offer the best value; an average yield of 7.25% represents a 120bp pick-up over US peers.

Related Articles