Rates: It's All About the Growth

Mid Week Bond Update

Rates: It's All About the Growth

Falling sovereign yields could be a symptom of a slowdown as well as a potential tailwind for growth in the coming year.


Rates: It's All About the Growth

The Fed's increasingly dovish stance is a reminder that central bank accommodation is intended, in part, to be conducive to the growth that could come from other economic forces.

Some observers believe that genuine growth can't be achieved by changes in monetary policy alone.  But in the absence of other tools, and with its policy mandate to stay clear of the political battles over fiscal, tax, and trade policies, the Fed has now joined the other major central banks in keeping rates low, attempting to make the world safer for growth.

Major bond markets appear to be taking the message on board. As shown in the chart, yields for ten-year government bonds have clearly fallen over the past year. China's accommodative stance, the latest dovish turn by the European Central Bank (ECB), and the Fed's policy backtrack have driven yields downward – in Germany's case, into negative yield territory.

But it is worthwhile to consider the recent dovish turn as a positive, signalling growing opportunities as well as rising worries.

 

Chart courtesy of Western Asset. Source: Bloomberg, as of 3/19/2019.  This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
 

On the rise: The Pool of Negative-Yielding Bonds

Between the ECB's recent announcements and the Fed's pullback on rate hikes, the total market value of the portion of the Bloomberg Barclays Global Aggregate Index1 with below-zero yields has reached $10.09 trillion.2 That's just under 20% of the value of the entire index, some $52.3 trillion.

$10 trillion isn't the largest on record; that honor goes to June 30, 2016, when the value reached some $12.17 trillion. But as a ratio of total market value outstanding, it's near the 2017 high of 20.3% reached on September 8, 2017.

It's important to note that these figures don't represent only the market value of investment-grade bonds issued with negative yields – some of which might be included in the $10.09 trillion, and some not – depending on post-issue market action. And some German 10-year bonds issued with small but positive yields have risen in price such that the yields are now calculated as negative – since they would generate a loss if sold at recent mark-to-market values.

But as an indication of the accommodative tone of central bank policies, these figures are worthy of contemplation in the coming year as policies and market unfold.
 

On the slide: The Euro, more than Sterling

As the Brexit drama continues to unfold, the euro appears to be under slightly more pressure than the British pound. Since the end of February, the pound has fallen -0.41% vs the dollar to $1.3210, while the euro has fallen -0.84%, to $1.1275.

Some observers believe that the pound may be suffering from crisis fatigue – or that the political probabilities, as well as the impact of the possible outcomes – are impossible to calculate. At the same time, it appears that GDP within the eurozone could be reduced no matter the outcome.

One barometer of financial tension can be found in the price of the Swiss franc, which is often used as a relatively safe – if illiquid – haven within Europe.  The franc has risen 0.44% vs. the dollar, to $0.994 since the end of last month.

 


All data Source: Bloomberg as of March 26, 2019 unless otherwise specified.

1 Bloomberg Barclays Global Aggregate Index

2 Source: Bloomberg, March 25, 2019

 

Definitions:

The Bloomberg Barclays Global Aggregate Bond Index is an unmanaged index of global investment-grade fixed-income securities; the Market Value measures the market value of all securities included in the index.

The Bloomberg Barclays Global Agggregate Negatove Yielding Debt Index is the  subset of the Global Aggreegate Bond Index for which yields are less than zero percent; the Market Value measures the market value of all securities included in the index. 

The Federal Reserve (Fed) is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

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