GLOBAL FIXED INCOME OUTLOOK

Looking to 2019: Reasons for optimism

BlackRock |02-May-2019

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

 


We believe that the fixed income universe is ripe with opportunities going into 2019. Clearly, we have entered something of a new paradigm in fixed income markets where the era of 'easy money' from quantitative easing (QE) is coming to an end. Years of excess global liquidity since the global financial crisis (GFC) have helped drive yields and spreads lower across bond markets; an environment ideal for pursuing price returns. Now, with liquidity being withdrawn globally and yields rising, the emphasis is shifting to the income, or 'carry', component of total returns.

 


Fixed income highlights:

  • We expect a growing emphasis on the income component of total returns.
  • The increasingly volatile market environment creates opportunities for active management to add value, particularly in areas with a high degree of headline political noise such as Italy and the UK.
  • Tighter financial conditions are set to play a greater role in the US Federal Reserve (Fed) policy setting, while forward guidance from the European Central Bank (ECB) and the Bank of Japan (BoJ) is likely to remain relatively cautious.
  • A difficult environment during 2018 for Emerging Markets now presents compelling opportunities, although vulnerabilities still exist and warrant a high degree of selectivity.
  • Environmental, Social and Governance (ESG) factors will continue to play an important role in security selection within global credit markets throughout 2019. We will continue to pursue a strategy of selecting high-quality names for income generation.

Snapshot

2018 has proven to be a challenging year for global fixed income markets. Higher interest rates, the withdrawal of liquidity from central banks, idiosyncratic events and increasing volatility have weighed on returns across the global bond market universe. The weakness has been broad-based across asset classes. Indeed, a remarkable 91% of fixed income assets have delivered negative returns over the year.

Percentage of fixed income assets with positive vs negative returns

Graph

Source: Bank of America Merrill Lynch, November 2018. YTD to 23 November 2018. The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results.

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