Slowing Economic Growth and the Impact for Fixed Income Investors
In the first of a series of videos providing updated views on financial markets, Jim Cielinski, Global Head of Fixed Income, discusses the implications for fixed income investors of a flat U.S. yield curve, dovish central banks and an aging business cycle.
- In the U.S., a flat yield curve means investors can earn roughly as much income from short-term rates today as they would at the long end of the curve but with potentially less volatility.
- At the same time, corporate credit could be well positioned in an environment where central banks step back from monetary tightening and global economic growth continues, even if more slowly.
- However, as the business cycle ages, sentiment can shift dramatically, making it important for investors to remain focused on fundamentals, in our opinion.
Jim Cielinski: When we look at rates, and I will start with the U.S., it is a very flat yield curve, meaning you get about the same yields on a 10-year note as you would on say a six-month or a 12-month security.
So I think for fixed income investors, if they are seeking low volatility, what you will find is the income on the short part of the yield curve is almost equivalent to what you get by going out longer. And so that part of the curve looks attractive for that type of approach.
When I look globally, I think the inflection point in growth is important for everybody. And central banks, I think, are supportive in almost all markets. Where perhaps it is more important is in emerging markets. If you think of strong U.S. growth, a strong dollar, those were very damaging, I think, to the emerging market case, particularly with China slowing and trade frictions, right? So as those kind of unfold or at least recede a little bit, I think this environment still is quite positive for emerging markets generally.
I think corporate credit is very interesting. When we think of what a corporate credit cycle looks like, there is a lot of debt out there and that is always one important ingredient in forecasting the end of a credit cycle. But the other ingredients are you need something to limit your access to capital and that is why if central banks keep tightening, they remove that capacity from the market, and that is important, right? So I think as economies are growing and the central banks are stepping back, what you have seen is, I think, a lessening of that risk. The final thing you are going to need for a real turn in the credit cycle is a collapse in cash flow or earnings. And that part of the picture actually still looks fairly robust. It may not be so forever, so there is always this focus on, is the cycle about to end? And it is clearly in the late innings, but until you get those missing two ingredients that really come to the forefront, I don’t think we are on the verge of some type of credit collapse, although there is a lot of debt, let’s make no mistake about that.
When I look at what often happens in late cycles, it is that the fundamentals are shifting a little bit, but quite often the sentiment shifts a lot. And we saw that last year, where people would worry about inflation one quarter and they would worry about recession the next. I think it is important, though, to look at the facts, look at the fundamentals, and don’t get caught up in these really violent sentiment shifts. I think that is important for investors at this stage.
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