‘Excruciating’ time for bond investors

19 September 2019

The combination of low yields and low interest rates are leaving bond investors in an ‘excruciating’ position, according to Western Assets’s chief investment officer Ken Leech, as they struggle to find positive returns.

Rates were cut by the Reserve Bank of Australia twice this year and stood at 1% while it was a similar case for central banks worldwide such as the US Federal Reserve and European Central Bank.

Some $16.7 trillion of debt traded in negative yields and the US market was the only country where positive yields were available, with the US holding 95% of its positive yield in the investment grade space.

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Leech said he expected any tightening by central banks would be a ‘long time in coming’, which left investors at the mercy of low rates.

Reasons for further rate cuts were given as a downshift in global growth, particularly in manufacturing, and the weakness in global trade as well as increased uncertainty and downside risks such as the US/China trade war.

“A fixed-income investor today is in a truly excruciating position. Yields are at or near historic lows in the developed world, spreads are tighter than they have been in the recent past and, most importantly, there is very little prospect that central banks will provide any higher interest rates in the reasonably foreseeable future,” Leech said.

“We think the prospect of any renewed tightening campaign by central banks will be a very long time in coming. The inability to get inflation to—let alone above—targets is sobering. We think the operative policy for tightening going forward will be a wait-and-see approach. No more tightening will be allowed based on central bank forecasting.

“Instead, inflation will actually have to show up. Only when it rises above target, and stays there for the hoped-for "sustained period of time" (which seems to mean at least a year), will we see any higher policy rates.”

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