BLOG

Why there is still value in fixed income

Arif Husain , Head of International Fixed Income

Sentiment toward the global economy is beginning to shift. So far this year, the focus has been largely on recession fears and central bank easing, which has been good for long‑duration assets such as high‑quality government bonds, investment‑grade (IG) corporate bonds, and BB rated high yield bonds. Fears over a recession are beginning to diminish, however, and while central banks are likely to continue easing, there is a limit to how much further they can go. So central bank easing could soon give way to a quiet period in which rates remain on hold.
 

We’re just at the beginning of this period of change. There is understandably still a lot of caution out there, but recent positive developments in U.S.‑China trade talks have boosted confidence. While many international organizations continue to cut economic forecasts, our economics team recently upgraded its forecasts for European and U.S. growth next year. This is predicated on easier financial conditions, which have eased materially over the past year – an indication that the investment environment is likely to change.  
 

While many international organizations continue to cut economic forecasts, our economics team recently upgraded its forecasts for European and U.S. growth next year

One of the most likely manifestations of this could be a steepening of the yield curve as future inflation expectations rise. This will probably mean that long‑duration bonds, such as high‑quality sovereigns, will begin to perform less well. Investment‑grade companies in stable countries, which have been widely owned while investor sentiment has remained cautious, may also begin to fare worse than other asset classes as optimism returns.
 

What will perform instead? Most likely, the assets that investors have been avoiding for the past year or so. These include single B and CCC rated high yield bonds, which have underperformed the BB space this year and could start to outperform higher‑quality credit investments as people may begin to venture into riskier asset classes.
 

For emerging market bonds, the absence of short-term price pressures should continue to be supportive as central banks will be encouraged to keep monetary policy accommodative. Local debt of emerging market countries, in particular, stands to benefit in this environment. This includes countries like Indonesia as local inflation is expected to remain well behaved.  
 

Although inflation is currently muted in most countries, unemployment is also low and business investment has been weak, so inflation may start to rise again over the medium term. If it does, Treasury inflation protected securities may do well. The U.S. dollar would be expected to decline in this environment, but that is a more difficult call.

The main risk to growth is probably U.S. China trade talks deteriorating once again

The main risk to growth is probably U.S.‑China trade talks deteriorating once again. However, as things stand, it seems like both sides want to at least maintain a truce through 2020. If that holds, growth is likely to recover—and a rotation in outperforming assets can be expected.


 

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

 

 

201910-999317

RELATED FUND
SICAV
Class I USD
ISIN LU1216622214
We use a flexible, benchmark-agnostic approach to invest across the full global fixed income opportunity set aiming to provide sustainable returns, capital preservation and diversification from equity risk. View More...
3YR Return
(Annualised)
1.89%
Avg Coupon
3.50%
FACTSHEET
Fund Size
(USD)
$978.6m
Avg Maturity
6.78 yrs
Avg Duration
4.81 yrs
RELATED FUND
SICAV
Class I USD
ISIN LU0133095660
A portfolio of holdings of between around 400 and 600 issuers that seeks to exploit inefficiencies in the full universe of the global fixed income and currency markets. View More...
3YR Return
(Annualised)
4.85%
Avg Coupon
2.63%
FACTSHEET
Fund Size
(USD)
$491.9m
Avg Maturity
9.75 yrs
Avg Duration
8.36 yrs