Global Fixed Income Returns in 2019

Global Fixed Income Update

December 19, 2019

At each round of rate cutting cycle, the global fixed income market prices the view that subsequent rates normalization becomes harder to implement. Exactly a year ago, the market selloff observed in December 2018 consolidated the path toward a U.S. Fed dovish pivot in January, which triggered a wave of rate cuts (or substantially more dovish language) by the Fed and by other global Central Banks. The market only gradually grasped the significance of the Fed dovish pivot, in part because the Fed chose to characterize policy as just a modest mid-cycle adjustment. It took continued weakness in global manufacturing data, and its manifestation in the U.S. economy, for yields to continue grinding lower, culminating with peak low yields around August, amid trade war escalation. Some of that pessimism has been priced out of the market, but global yields are still substantially lower than one year ago.

We go into 2020 with a great deal of optimism already priced in – courtesy of the much awaited U.S.-China phase 1 deal – but with lower global yields. As we build our scenarios for global fixed return drivers in 2020, it is helpful to look more closely at the sources of returns this year. Looking back, this was (once again) a year in which monetary policy – in both developed and emerging markets – had a large influence on returns, by lowering yields and therefore generating capital gains and contributing to credit spread compression. FX returns were much less influential to global benchmark total returns, but there was significant differentiation in individual currency performance. It was also a year in which overall good returns happened at the same time as select weaker credits sold off massively. Argentina, after the August 2019 primary elections, is perhaps the best example. In contrast, weak credits heading in the right direction (Greece comes to mind) outperformed by a wide margin. Credit selection was therefore still key to alpha generation, particularly in the high yield space.

Global IG Fixed Income Returns, in U.S. Dollars, YTD (%)

Source: Bloomberg Barclays Global Aggregate returns as of 12/16/2019.

Looking at returns by sectors, global corporate credit led total returns, in both absolute and duration adjusted terms. Overall, spread products benefited from a unique mix of plunging industrial activity and weak forward looking manufacturing indicators – which prompted global central bank easing – combined with still robust labor markets and healthy consumption/services sectors.

Global IG Sector Returns, in U.S. Dollars, YTD (%)

Source: TCW calculations based on Bloomberg Barclays Global Aggregate returns as of 12/16/2019. Sector returns are scaled by units of total benchmark duration.

Turning to individual country Treasury returns, three economies stand out: Australia, New Zealand and the United States. The three share a similar path in which the monetary authority initiated a rate cutting cycle much sooner than expected until early 2019.

Duration-Adjusted Global Treasury Bond Returns, in Local Currency, YTD (%)

Source: TCW calculations based on Bloomberg Barclays Global Aggregate returns as of 12/16/2019. Country returns are scaled by units of Treasury benchmark duration. Exchange rate fluctuations are excluded from returns calculations. Returns are shown in local currency terms. Global Treasuries returns are the benchmark returns for the sector, measured in U.S. dollars.

Curve flattening trades worked well in general, with substantial 10s30s curve flattening, especially in the Eurozone periphery (Italy being the exception).

Global Treasury Yield Change (last 12M)

Source: Bloomberg

The Eurozone rates dynamic, including its substantial curve flattening pattern, fully captures the predominant theme throughout 2019, to wit, that lingering trade war pushed Central Banks towards easing and further away from the elusive rates lift off. The chart below shows the substantial repricing of market expectations about ECB policy this year:

ECB Policy Rate Path Priced in Euro Swaps Curve (Now versus 1Y Ago)

Source: Bloomberg

Looking ahead, we head into 2020 with markets pricing out the risk of trade war escalation. Yet, we can envision two distinct but equally reasonable scenarios. The setup in both scenarios departs (once again) from a seemingly goldilocks situation, with the bar being very high for rate hikes (it would be an excessively drastic U-turn) and an environment more friendlily to manufacturing and risk appetite in general, as long as the trade truce holds. If the market is right about this, then global yields could still be too low, even after the 2019 Q4 repricing. The source of returns in 2020 will then likely shift from rates to currencies, with those from more open economies benefitting the most. Alternatively, if the trade truce does not hold – or if it does, but its damage to business investment appetite lingers – then we may have a repeat of 2019: global yields grinding lower after a brief selloff and the U.S. dollar once again defying predictions of its underperformance.


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This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW