Strategic Fixed Income — reflationary impulse back on the menu (for now)
9 minute watch
The current endless array of contradictory economic data releases, particularly in the US, in addition to other factors such as political and trade war rhetoric are making it difficult to decipher what is truly happening in the markets and the economies. John Pattullo, Co-Head of Strategic Fixed Income, discusses the major trends in the markets and provides an insight into the Strategic Fixed Income Team’s current thinking.
While conscious of the current inflationary impulse running through the markets, the team are not convinced that the trend will last more than a few months and that a real breakout into a sustainable higher growth and higher inflation is on its way. However, they remain open-minded and continue to look out for signs that could confirm whether there will be a soft or a hard landing in the US economy in the coming months.
Key takeaways:
- In October 2018, when the markets were full of euphoria about growth and inflation breaking higher, expecting bond yields to rise, we held the opposite view. Over the interim, bonds rallied significantly and yields fell. Now, however, we believe that the trough in economic activity is with us.
- Currently, bond and equity markets are sending contradictory signals; in the US, bond markets see the economy as late cycle, signalling a hard landing, while equity markets see it as mid cycle with a soft landing ahead. Queue: the re-emergence of reflation trades.
- Reflation trades are not that uncommon; there have been thirteen since 2008, each lasting about one to nine months. There have been two this year: a mini one in April and the second since September, when bond yields bottomed and equities rallied significantly.
- While we agree that the bond markets ran a little bit ahead of themselves and have now retraced some of their steps, we are not convinced that a big breakout of sustainable, higher growth and higher inflation is on its way. However, we remain open-minded as to whether the US, the largest economy in the globe, will face a soft or a hard landing.
In the video, John Pattullo mentions returns of the S&P 500 Index, the ICE BofAML CCC and Lower US High Yield Index and, ICE BofAML BB US High Yield Index, total returns in local currency, year-to-date to 31 October 2019. Past performance is not a guide to future performance.
Correction: ICE BofAML BB US High Yield Index is up 13.7% year-to-date and not 12% as mentioned in the video.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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Important information
Please read the following important information regarding funds related to this article.
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund may invest in contingent convertible bonds (CoCos), which can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares of the issuer or to be partly or wholly written off.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund may invest in contingent convertible bonds (CoCos), which can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares of the issuer or to be partly or wholly written off.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
9 minute watch