U.S. Beckons Yield-Starved Global Investors

Investors from outside of the United States seeking higher relative yields will likely continue to support Treasurys as global rates languish.

August 17, 2016

This sector report is excerpted from the Third Quarter 2016 Fixed-Income Outlook.

The global move to lower yields continued in the second quarter. While the quarter started out with a strong March employment report and hawkish rhetoric from the Fed, economic and employment data for April and May surprised the market by coming in below expectations, tabling a summer rate hike. As the quarter progressed, global markets became increasingly focused on the United Kingdom’s referendum vote on whether or not to stay in the European Union. To almost everyone’s surprise, the United Kingdom voted to exit the EU, and global risk assets sold off significantly while global sovereign bonds rallied to new all-time low yields in many countries. During the course of the quarter, the 10-year U.S. Treasury yield declined from 1.77 percent to 1.47 percent; the 10-year German bund yield declined from 0.15 percent to -0.13 percent; the 10-year Japanese government bond yield declined from -0.04 percent to -0.22 percent; and the 10-year U.K. gilt yield declined from 1.41 percent to 0.86 percent.

Better Relative Value in U.S. Treasurys

Global sovereign bonds rallied to new all-time low yields in many countries. Higher yields in the United States should attract foreign flows of capital, potentially reducing yields further. On a real and nominal basis, U.S. 10-year Treasurys offer better returns than 10-year sovereigns in other developed countries.

Better Relative Value in U.S. Treasurys

Source: Bloomberg, Guggenheim Investments. Data as of 7.30.2016. Real yields shown are deflated by the latest consumer price index reading in each country.

With the move to lower yields, performance was strong for Treasury and Agency bonds during the second quarter of 2016. The Barclay’s U.S. Treasury index generated a total return of 2.1 percent for the quarter, and 5.37 percent year to date. The Barclays U.S. Agency index generated a total return of 1.73 percent for the quarter with a year-to-date total return of 4.19 percent. The Barclays Global Treasury index generated a total return of 4.05 percent for the quarter, with a yearto- date total return of 11.63 percent.

With extremely low and negative bond yields outside of the United States, we believe that U.S. rates will remain relatively attractive. Higher yields in the United States should attract foreign flows of capital, potentially reducing yields further. Additionally, we believe that German bund yields will remain low and possibly move lower, and given the historical correlation, this could also support U.S. rates. We find particular value in longer Agency bullets, callable bonds, and strips.

Post-Brexit Flight to Safety Puts Pressure on Yields

Sovereign yields declined further following the U.K.’s vote to leave the EU as investors sought refuge from volatility. German 10-year bund yields closed below zero in the second quarter. U.S. 10-year Treasury yields also fell, ending the quarter at only 1.47 percent. We expect global central bank accommodative monetary policy will continue to push rates lower, with the 10-year Treasury note possibly reaching 1 percent.

Post-Brexit Flight to Safety Puts Pressure on Yields

Source: Bloomberg, Guggenheim Investments. Data as of 7.30.2016.

—Connie Fischer, Senior Managing Director; Tad Nygren, CFA, Director; Kris Dorr, Director

Important Notices and Disclosures

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.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.


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