WisdomTree: Slowing growth expectations could be a driver of bond yields

WisdomTree: Slowing growth expectations could be a driver of bond yields

Outlook Yield curve
Outlook vooruitzicht (07)

Lidia Treiber, Director, Research, WisdomTree looks at the outlook for fixed income in 2020

  • Yields are likely to remain low for an extended period given a combination of slowing global growth and muted inflation.
  • Longer duration bonds can help provide a cushion against uncertain equity markets.
  • Tactical allocations within credit for income enhancement and diversification as investors need to find income in diverse ways.

Performance review for the year

Fixed income asset classes have generally performed well in 2019 as investor flows into government bonds rose sharply due to increasing concerns around slowing global growth, trade wars and Brexit. As demand for historically safe-haven assets increased, government bond yields moved lower driving many European government bonds into negative yield territory. Meanwhile investors requirements for higher yielding bonds have provided support for risk assets. This year, fixed income Exchange Traded Funds (ETFs) in Europe have garnered $40.22 billion year to date[1], accounting for nearly 53% of all Exchange Traded Product (ETP) flows with fixed income ETF flows globally hitting a new milestone in the second quarter of the year.

Fixed income asset classes that stood out

US investment grade corporate bonds outperformed most major fixed-income assets, up 15.22% year-to-date to 12 November 2019. One of their best returns in nearly a decade as investors sought for high-quality yield in a negative yield landscape. By the same token, European government bonds which started the year at very low yields, surprised investors with nearly 10% return for the same period.

One fixed income asset class that has provided double digit returns, considering this timeframe, in comparison to its equity counterpart is additional Tier 1 contingent convertible bonds (AT1 CoCos) as referenced in Figure 1 (see attached). Regulatory requirements such as Basel III in addition to other measures have pushed European banks to improve their capital reserves and as such the European banking system in 2019 is much better capitalised than it was prior to the last financial crisis. AT1 CoCos do not sit on major European benchmarks and can offer diversification benefits to other risk assets which has raised their profile among the investor community.