Bonds Commentary
Previous

Fear Trade Wavering

February 2019

On the heels of December, which saw investors flock to safety and throw capital into all manner of high quality fixed income instruments, January proved to be a welcome reprieve for riskier credits as high yield corporate bonds rallied alongside stocks. The Bloomberg Barclays U.S. Corporate High Yield Index returned 4.5% during the month after a 2.1% drop in December and a 4.5% decline over the course of the 4th quarter of 2018. One word characterized the fourth quarter - fear. Fear surrounding a potential FOMC policy misstep, fear tied to political uncertainty and dysfunction in D.C. and abroad, and fear over a lack of progress on the U.S./China trade front. In short, there was no “one thing” driving the risk-off sentiment that engulfed markets, it was multiple things.

Early on in ‘19 we’ve received some clarity on issues that eluded us late last year. Investors at least believe they have more clarity on FOMC policy, while U.S./China trade relations remain a complex subject, with the two sides appearing either closer to a resolution or “miles and miles” away from one as Commerce Secretary Wilbur Ross described it, depending upon what day of the week it is, who’s talking, and the news outlet reporting - at least the two sides remain engaged with dialogue ongoing. Given recent economic data releases out of China and fragile market sentiment here in the U.S., both sides appear to need a win. China sent a trade representative to the U.S. the last week of January, and a meeting between President Trump and China’s President Xi Jinping is rumored for mid-February. Our expectation remains that a half-deal will materialize prior to the March 1 deadline, while structural issues, i.e. the theft of intellectual property by Chinese firms, will take longer to hash out. The thawing of frosty trade relations would be a decidedly positive outcome for stocks and corporate bonds.

The bright spot in the Treasury rally is that investors allocated across a portfolio of both stocks and investment-grade bonds have likely experienced desired diversification benefits as prices of Treasury bonds have rallied as stocks have sold off - a much more palatable outcome relative to February when both stocks and Treasury bonds pulled back in unison. The downside of the recent rally in long-dated Treasuries is that expected return should now be lowered as the yield to worst on the Bloomberg Barclays U.S. Treasury Index has dropped to just 2.6%. Treasury bonds continue to have a place in a broadly diversified portfolio, but the recent downdraft in yields on lowered growth expectations may be set up to reverse course as the pendulum of investor expectations shifts back toward economic slowdown and away from recession. A trade deal with China would undoubtedly expedite this process.

The Bloomberg Barclays U.S. Treasury Index rose 2.5% from October through December amid the ebb and flow of news on the aforementioned issues/topics. We believe the rally in long-term Treasury yields is likely overdone given our expectation that U.S. GDP growth will be in the 2.5% area for full-year 2019. The 10-year U.S. Treasury bond carried a yield of just 2.63% at the end of January – just 8 basis points above the yield on 1-year Treasury paper. Duration was your friend in the risk-off environment that materialized in 4Q, and exposure to long-dated Treasuries remains a good diversification tool, but there’s little “value” in the 5 to 10-year portion of the curve at present. There remains significant demand for long-dated assets from pensions and insurance companies, among others, but foreign buyers appear poised to potentially scale back purchases as select countries attempt to reduce exposure to the U.S. dollar and dollar-denominated assets. We expect the 10-year yield to move higher over the coming quarters as the FOMC pauses, recession fears take a back seat, and inflation gradually rises, likely leading to at least one hike in the Fed funds rate in the back-half of ’19.

Source: AAII, Bloomberg, Factset

Next

On a scale from 1 to 5, with 1 being 'Not Good' and 5 being 'Excellent', how would you rate this article?

Press enter to submit your rating

Rate this Article

Use this form to provide additional feedback based on the rating you provided.

Thanks for Rating

Would you like to provide feedback?

Thanks for your feedback!

The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Re¬gions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products. The information and material contained herein is provided solely for general information purposes. Regions does not make any warranty or representation relating to the accuracy, completeness, or timeliness of any information contained in the newsletter and shall not be liable for any damages of any kind relating to such information nor as to the legal, regulatory, financial or tax implications of the matters referred herein. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Regions Wealth Management is a business group within Regions Bank that provides investment, administrative and trustee services to customers of Regions Bank.

Neither Regions Bank nor Regions Institutional Services (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific retirement investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.

*Investment, Annuities and Insurance Products

  • Are Not FDIC Insured
  • Are Not Bank Guaranteed
  • May Lose Value
  • Are Not Deposits
  • Are Not Insured by Any Federal Government Agency
  • Are Not a Condition of Any Banking Activity