May 24, 2016
Anemic global economic growth in the first quarter of 2016 prompted central banks to move to a more accommodative stance, resulting in yields moving lower globally. The Bank of Japan surprised markets by moving its overnight policy rate to -0.10 percent; the European Central Bank expanded its monetary policy stimulus further by increasing the size of its monthly purchases and the scope of eligible investments; and the Federal Reserve further decreased its projections for monetary policy tightening and terminal federal funds rate. Further supporting lower U.S. and global bond yields was a general risk-off sentiment that persisted in the markets at the beginning of the year. Even as risk assets recovered during the latter part of the quarter, global yields remained low.
In its last three projections for the future path of the fed funds rate, the Fed has continually ratcheted down its estimate. Thus, since September, the Fed’s estimate of the terminal rate in 2018 has declined from 3.4 percent to 3 percent.
Source: Federal Reserve, Guggenheim. Data as of 3.31.2016.
During the course of the quarter, the 10-year U.S. Treasury yield declined from 2.27 percent to 1.77 percent; the 10-year German bund yield declined from 0.62 percent to 0.15 percent, and the 10-year Japanese Government Bond yield declined from 0.25 percent to -0.03 percent. Inflation expectations in the United States, as shown by 10 year TIPS breakeven rates, were volatile during the quarter, starting at 1.58 percent and ending at 1.63 percent after declining to a low of 1.2 percent in February. With the move to lower yields, performance was strong for U.S. Treasury bonds and Agencies during the first quarter of 2016. The Barclays U.S. Treasury index generated a total return of 3.2 percent, with intermediate maturity Treasury bonds generating a total return of 2.4 percent, and longer maturity Treasury bonds generating a total return of 8.2 percent. The Barclays U.S. Agency index generated a total return of 2.4 percent for the first quarter of 2016.
Looking ahead, we continue to believe that U.S. fixed income will remain relatively attractive, given the extremely low and negative levels of global bond yields. In U.S. rates, we continue to find value in longer-dated callable Agency bonds and Agency strip securities. Furthermore, declining net supply in U.S. Treasury and Agency securities, along with increased demand for high quality assets, should continue to support the asset class.
One of these things is not like the others. The U.S. Treasury yield curve is materially higher than the sovereign bonds of competing developed countries, reflecting differences in monetary policy, growth, and inflation expectations. For example, this chart compares relative yields for selected sovereign 10-year notes: The U.S. yields 1.77 percent, compared to -0.03 percent for Japan, 0.15 percent for Germany, and 0.49 for France.
Source: Guggenheim, Bloomberg. Data as of 3.31.2016.
—Connie Fischer, Senior Managing Director; Tad Nygren, CFA, Director; Kris Dorr, Director
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment-grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating-rate senior-secured syndicated bank loans and other floating-rate securities involve special types of risks, including credit risk, interest-rate risk, liquidity risk and prepayment risk.
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