Global Outlook Active Global Fixed Income Fourth Quarter 2016 1 GLSTND ‐ 1883
Major Macro Challenges for Markets in 20 16 Bouts of volatility keep global governm ent bond yields w ell supported CHINA FE D GE OPOLITICAL Risk of RMB devaluation Focus on global developments Middle ‐ East tensions Credit and Investment bubbles Cautious inflation outlook Oil prices ‐ lower range Housing % GDP over 3x US peak Slower pace of rate hikes Political instability € $ ¥ E UROPE US Japan Controversial Presidential election Migrant crisis 2% inflation by mid ‐ 2017? Congressional gridlock QE distortions Diminishing return from policy Weak external environment actions Fears of “Brexit” weighs on outlook Capital flows moving overseas Boost from weaker Euro fading Liquidity issues in JGB Market Source: SSGA QE = Quantitative easing “Brexit” = Britain exit from European Union Fed = US Federal Reserve GLSTND ‐ 2409 2
Global Bond Market Landscape POLICY E CONOMY LOW-FLATION Convergence Oil, USD and Wages RE BALANCING GROWTH Fed slows normalization Loose policy in Europe and Central bank caution – - - - pace Asia asymmetric risks in global outlook and lower oil price ECB and BOJ increase QE Modest help from fiscal - - policies Less upward pressure on - USD with fewer rate hikes “Brexit” risk delays BOE - action Shrinking output gaps – - though still negative Low productivity and - subdued wage growth China - RMB stability - preferable Source: SSGA ECB = European Central Bank BOE = Bank of England BOJ = Bank of Japan GLSTND ‐ 2409 3
US Fixed Income Market – Volatility Volatility is at historical lows 300 250 200 bp 150 avg = 94bp 100 50 60bp 0 Jan ‐ 00 Jan ‐ 02 Jan ‐ 04 Jan ‐ 06 Jan ‐ 08 Jan ‐ 10 Jan ‐ 12 Jan ‐ 14 Jan ‐ 16 MOVE Index avg. • Volatility is at historically low levels, which increases demand for carry • Investors try to source carry from higher yielding sectors and selling volatility • Negative feedback loop ‐ increased demand to sell volatility at such low levels erodes the risk premium received by investors • Is yield premium appropriately priced for level of risk? Source: Bloomberg Data as of September 30, 2016 4 CMINST ‐ 11310
US Fixed Income Market - Volatility Rolling 120 day Volatility over time 1.60 Standard Deviation (Yield %) 1.40 1.20 Lehman Peripheral 1.00 Brothers crisis 0.80 Similar levels to Similar levels 0.60 US Taper Greece current to current Summer 15 0.40 0.20 0.00 US 2Y Germany 3Y Italy 3Y US 10Y Germany 10Y Italy 10Y • Reactions to geopolitical events or monetary policy communication mistakes could result in market corrections that are exacerbated by current positioning • Low level of risk premium decreases “yield cushion” which helps investors to hold into volatility events • Investors search for yield has driven portfolio allocations into lower credit, less liquid, unfamiliar sectors, which could potentially result in increased selling pressure in response to vol events Source: Bloomberg Data as of September 30, 2016 5 CMINST ‐ 11310
Key Drivers of Lackluster Global Growth 1. Global excess slack: Output gaps are negative and labor market slack persists 2. Weak productivity growth: Lack of business investment 3. Lower potential GDP: Demographics and weak productivity 4. Limited policy options: monetary policy exhausted, little appetite for fiscal stimulus As of September 29, 2016
Lackluster Global Growth Continues Global Growth 7 6 5 4 3 2 1 0 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 World GDP, % chg y/y Historical Growth Trend (3.7%) 2016 and 2017 are forecasts. Sources: IMF, Oxford Economics, SSgA Economics Team The above forecast is an estimate based on certain assumptions and analysis made by the SSGA Economics Team. There is no guarantee that the estimates will be achieved. This is not a prediction or projection of actual growth. 7 CMINST ‐ 14240
Global Bond Yields Grinding Ever Lower As of September 29, 2016 Past performance is not a guarantee of future results. 8
Negative Yields on the Rise Global Bond Indices Aggregate Treasury Gov ‐ Related Corporate Securitized 40 35 % of Index with Negative Yields 30 25 20 15 10 5 0 Jun ‐ 11 Dec ‐ 11 Jun ‐ 12 Dec ‐ 12 Jun ‐ 13 Dec ‐ 13 Jun ‐ 14 Dec ‐ 14 Jun ‐ 15 Dec ‐ 15 Jun ‐ 16 Source: SSGA As of 30 July 2016 Past performance is not a guarantee of future results. GLSTND ‐ 2409 9
Recommend
More recommend
