Bond outlook 2020

Treasury yields fluctuated on Tuesday after optimism from policymakers that the coronavirus pandemic may have reached its peak. The yield on the benchmark year Treasury notewhich moves inversely to price, was flat at 0.

States on the east and west coasts on Monday formed regional pacts in the hope of forging gradual economic reopenings, as the rate of coronavirus infections finally appeared to be slowing. New York Gov. Andrew Cuomo struck an optimistic tone about the outbreak in his state, the epicenter of the pandemic in the United States.

Yields also received a boost to begin the week after OPEC and its oil-producing allies on Sunday agreed in a historic deal to cut production by 9. Sign up for free newsletters and get more CNBC delivered to your inbox. Get this delivered to your inbox, and more info about our products and services.

Corporate Bond Market Outlook Q1 2020

All Rights Reserved. Data also provided by. Skip Navigation. Markets Pre-Markets U. Related Tags. News Tips Got a confidential news tip? We want to hear from you. Get In Touch. CNBC Newsletters. Market Data Terms of Use and Disclaimers.While recessionary worries gripped the market ineconomic news turned positive in and has remained so into January of this year.

2020 Vision: Bond Market Outlook

Accordingly, both the stock and bond markets have soared over the past year. Aggregate Bond Index has returned a less princely--but still respectable But are stocks and bonds likely to repeat those strong gains over the next decade? Not likely, according to my latest survey of capital markets forecasts released by leading investment firms. Thanks to equity valuations that are even more constrained than they were a year ago, most of the shops I featured in my now-annual compilation are anticipating meager returns from the stock market over the next decade.

How to Use These Forecasts At this point, many sensible readers are probably thinking, "Why bother making predictions? Everyone knows you can't predict the market's direction! That skepticism is well placed, especially over short time horizons. But the fact is, you need to plug in some sort of a long-term return expectation for planning purposes.

How Bond Yields Will Perform In 2020 | Outlook 2020: Bond Markets

Without such a forecast, it's impossible to know how much of a helping hand to expect from the market, and how much of the heavy lifting you'll have to do on your own, either through saving more if you're still in savings mode or withdrawing less if you're retired.

Before you embed these or any other return forecasts to into your plan, however, it's important to bear in mind that these return estimates are more intermediate-term than they are long.

The firms I've included below all prepare capital markets forecasts for the next seven to 10 years, not the next As such, these forecasts will have the most relevant to investors whose time horizons are in that ballpark, or to new retirees who face sequence-of-return risk in the next decade.

Investors with very long time horizons of 20 to 30 years or longer can reasonably employ long-term historical returns, but they may want to haircut them a little bit to incorporate what could be a tough next decade.

bond outlook 2020

It's also important to note that the parameters for these return estimates vary a bit; some of the return expectations are inflation-adjusted while others are not nominal. In addition, some of the experts forecast returns for the next decade, while others employ slightly shorter time horizons. The firms also vary in their approaches to formulating the forecasts, though most rely on some combination of valuations, current yields, and earnings-growth and inflation expectations to arrive at return expectations.

BlackRock Investment Institute's Capital Markets Assumption report allows users to home in on return expectations for a broad swath of asset classes and time periods, from five to 25 years.

For each asset class, the firm provides a median expected return, as well as "uncertainty bands" depicting returns in a range.Let me start with two predictions. This is why I trademarked the idea many months ago, and now expect to retire on the proceeds of all the copyright breaches. If you do believe that is the year for bond bears finally to triumph, I think you have to believe that a lot of very long term, established trends are about to come to an end simultaneously.

These trends are the Secular Seven. If you think that their powers are at an end, or significantly diminished, then you should join the January anti-bond mob with their pitchforks and flaming torches. OK Boomers. In the s and onwards as the Boomers left education and came to dominate the workforce, the labour scarcity that had been a feature of the western economies for a couple of decades started to come to an end.

Trade Unions lost their membership and their power, and wage inflation dropped. Economies became more productive, and wealthier. With largely young and healthy populations, pressures on the welfare state for example pension burdens, and care and healthcare costs for the elderly were relatively subdued.

2020 Vision: Bond Market Outlook

As the demographic basketball the Boomers passed through the snake and reached peak earnings, their desire to save and invest those savings also hit new highs. Demand for income and safe assets grew dramatically — driving bond yields down.

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The dramatic deflation in consumer goods is one answer, and a good part of that has been driven by the collapse in the price of technology. Think also of all the free stuff that the internet provides, from maps to encyclopaedias and news, and perhaps the impact of low inflation is actually understated. The transparency of the internet also allows me to find the cheapest thing in the world whenever I buy something.

Awful news for high street retailers, but the deliverer of a huge consumer surplus and disinflation. What does that do to wages? To employment and disposable income? It certainly sounds like a further technological leg down in price inflation is possible. US Treasury Bonds were thought to be almost uninvestable as yields were eroded by the rise in the cost of living.

Volker set the Fed Funds rate above the rate of inflation — at the time a radical idea. As labour has become less powerful since the entry of the Boomers into the economy, capital gained the upper hand and has taken the bigger share of profits and growth in developed economies for years now.

Governments have deregulated financial markets and labour markets with some notable exceptions like the introduction of the Minimum Wage in the UKand the emergence of the new tech giants the FAANGs has led to both increased competition in some areas Amazon has delivered massive consumer surplus in its race to acquire market dominance and monopoly creation in others Google is a verb as well as an online advertising giant.

Capitalism has thus kept wage growth low, and encouraged the growth of a tenuous gig economy landscape. Whilst there are examples of monopolies developing, as the land-grab continues, prices have stayed low.Marvin Appel.

An Economic slowdown is already priced into bond yields, writes Marvin Appel.

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What a difference a year — 15 months to precise—makes. Then the markets abruptly switched during the fourth quarter ofacting as if a recession was at hand. However, the bond market has not confirmed this optimism.

Rather, a certain foreboding remains priced into bonds. That spells modest opportunity in junk bonds and limited upside from investment grade bonds in The Treasury market gives two indications of economic prospects. First is the level of long-term interest rates; year yield, for example.

bond outlook 2020

When this falls it means that the economy is expected to slow. Ten-year yields remain near record lows, near their lowest levels since the last recession scare in see chart below.

This means that there is little room for Treasury notes or investment-grade bonds generally to appreciate in price or to generate attractive levels of interest income. The only bullish case for investment-grade bonds going forward is a significant recession, which some say could bring negative U.

Fortunately, as we will see below, the high yield bond market is not signaling the risk of a recession. The second Treasury-based indicator is the relationship between nominal Treasury notes conventional notes with fixed coupon payments and Treasury Inflation-Protected Securities TIPS where the total return depends on how much inflation occurs over the life of the bond.

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The stronger the economy is expected to be, the better TIPS will perform relative to nominal Treasuries. It is interesting to note that the total return on year TIPS will match those of year Treasury notes if inflation over the next decade averages 1.

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A decade of such low inflation has occurred just once sincefrom througha period which included the Great Recession of The chart below shows the spread in yield between corporate high yield bonds and Treasuries. From mid until mid corporate high yield bond spreads were very tight, meaning that the bond market was pricing in very little credit risk for high yield borrowers.

However, during the fourth quarter of spreads widened from 3. This means that as far as the junk bond market was concerned, recession risks even at the worst part of were not as serious as in early Compared to the period of tight spreads in the chart, current spreads are distinctly more pessimistic.

But current spreads are nowhere near high enough to signal a serious recession threat. As is often the case, corporate high yield bonds represent the best bond opportunity in In the current flat yield curve environment, you are getting paid very little for the added duration risk of intermediate-term junk bonds compared to short-term.

Floating rate bonds are loans to below investment-grade borrowers, as are high yield bonds. The difference is that floating rate bonds adjust their yields every three months in parallel with changes in the Fed Funds rate.Marvin Appel.

An Economic slowdown is already priced into bond yields, writes Marvin Appel. What a difference a year — 15 months to precise—makes. Then the markets abruptly switched during the fourth quarter ofacting as if a recession was at hand. However, the bond market has not confirmed this optimism. Rather, a certain foreboding remains priced into bonds. That spells modest opportunity in junk bonds and limited upside from investment grade bonds in The Treasury market gives two indications of economic prospects.

bond outlook 2020

First is the level of long-term interest rates; year yield, for example. When this falls it means that the economy is expected to slow. Ten-year yields remain near record lows, near their lowest levels since the last recession scare in see chart below. This means that there is little room for Treasury notes or investment-grade bonds generally to appreciate in price or to generate attractive levels of interest income.

The only bullish case for investment-grade bonds going forward is a significant recession, which some say could bring negative U. Fortunately, as we will see below, the high yield bond market is not signaling the risk of a recession.

The second Treasury-based indicator is the relationship between nominal Treasury notes conventional notes with fixed coupon payments and Treasury Inflation-Protected Securities TIPS where the total return depends on how much inflation occurs over the life of the bond. The stronger the economy is expected to be, the better TIPS will perform relative to nominal Treasuries.

It is interesting to note that the total return on year TIPS will match those of year Treasury notes if inflation over the next decade averages 1.

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A decade of such low inflation has occurred just once sincefrom througha period which included the Great Recession of The chart below shows the spread in yield between corporate high yield bonds and Treasuries. From mid until mid corporate high yield bond spreads were very tight, meaning that the bond market was pricing in very little credit risk for high yield borrowers.

However, during the fourth quarter of spreads widened from 3. This means that as far as the junk bond market was concerned, recession risks even at the worst part of were not as serious as in early Compared to the period of tight spreads in the chart, current spreads are distinctly more pessimistic.

But current spreads are nowhere near high enough to signal a serious recession threat. As is often the case, corporate high yield bonds represent the best bond opportunity in In the current flat yield curve environment, you are getting paid very little for the added duration risk of intermediate-term junk bonds compared to short-term.

Floating rate bonds are loans to below investment-grade borrowers, as are high yield bonds. The difference is that floating rate bonds adjust their yields every three months in parallel with changes in the Fed Funds rate.

Because the Federal Reserve raised rates infloating rate bond funds were the best area of the bond market in However, with the Fed cutting interest rates three times infloating rate bond funds have lagged corporate high yield bond funds.The content on this website is intended for investment professionals and institutional asset owners.

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We opened our year-end IG corporate bond market review by noting that delivered its highest total return in a decade Considering that, it seemed to us that might be a market more suited for clipping coupons than capturing significant further upside. Spreads were below basis points bps. Interest rates appeared rangebound.

A reasonable expectation was for IG corporates to generate modestly positive total and excess returns in Reasonable expectations were redefined by the social and economic retreats that COVID forced on worldwide markets.

While economic growth was on solid footing as late as February, for the balance of the economic outlook will be shaped largely by the ability of the medical community to arrest spread of COVID and develop effective therapeutics to treat those who are infected. GDP is expected to show a modest decline in Q1 and turn materially negative in Q2 as effects of the coronavirus impact demand. The Fed and Congress have responded to the market turmoil in greater measure and more quickly than during the GFC in The dimensions of demand destruction will vary across industries, but stimulative policies and low global interest rates should be supportive of longer-term corporate performance after a wrenching adjustment.

On March 17,the Fed announced actions that we consider to be strengths for corporate bonds See our 1Q20 Corporate Trends Dashboard at the end of this update.

Bond Market Review & Outlook 2020

It reinstituted the GFC-era Zero Lower Bounds federal funds interest rate policy and reset the current fed funds rate range to 0 to 25bps in March. The Fed also relaunched a Commercial Paper Funding Facility CPFF through which it will buy 3-month bonds from companies with strong credit ratings to help those firms retain workers and handle operating costs. Also, the Fed will make loans to corporations secured by collateral. Details on monetary and fiscal responses are provided later in this review.

While the Fed is supportive, corporate profits and balance sheets are clearly at risk. We expect credit downgrades by the rating agencies, which is common during recessions.

bond outlook 2020

Looking back at prior market shocks may provide context for current conditions. Corporate debt leverage increased in past periods of economic contraction, as earnings before interest, taxes, depreciation and amortization EBITDA tend to drop faster than debt obligations.

Looking at the past three U. Issuers can take steps to mitigate the potential for financial stress to negatively affect their credit ratings. For example, reductions in capital expenditures capexhalts on share buybacks and some dividend cuts can be partial offsets for preserving liquidity and financial strength.We are providing certain data supplied to us by the Municipal Securities Rulemaking Board "the Service" without warranties or representations and on an "as-is" basis. You shall bear all risk, related costs and liability and be responsible for your use of the Service.

The transaction data provided through the Real-Time Transaction Subscription Service represents municipal securities transaction data made available by brokers, dealers, and municipal securities dealers to the MSRB and related information. The MSRB and its officers, directors, employees, agents, consultants, and licensors shall have no liability in tort, contract, or otherwise and as permitted by law, product liability to you or anyone else for any reason associated or in connection with, resulting from or arising out of your use of the Service.

The MSRB, its officers, directors, employees, agents, consultants, and licensors make, and have made, no recommendations regarding any of the securities or other investment vehicles, referred to or described in the Service. Low Volatility ETFs invest in securities with low volatility characteristics. These funds tend to have relatively stable share prices, and higher than average yields.

Investors who suspect that the stock market may be about to decline can take action to reduce the Please Enter Your Email. Please Select Your Advisor Type. Popular Articles. Free Newsletters Dividend. Mitre Media. Advertise With Us. Is your portfolio protected for what the markets will bring this fall? Creating a properly diversified portfolio can be a difficult proposition, especially when


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