SSGA-SPDR: Searching for yield in a sea of low rates

SSGA-SPDR: Searching for yield in a sea of low rates

28 januari 2021

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In its first quarter Bond Compass, SSGA-SPDR concludes that the reflation trade remains the dominant theme in the market, despite renewed lockdowns, with the vaccine rollout expected to result in a rebound in growth in 2021. The more favourable backdrop for risk assets coupled with low, or even negative, yields for much of the fixed income universe is likely to see investors searching for higher yielding assets.

Key Themes for Q1-2021

Yield Rush

  • For fixed income investors, 2021 should be about searching for yielding assets. Emerging markets (EM) provide yield of around 3.5% and may benefit as a return by investors to EM debt, which started in 2020, gathers pace.
  • Local currency debt should benefit given the potential for EM forex appreciation to add to bond returns with the USD weakening trend expected to remain in place.
  • The global investor underweight to Chinese bonds could see inflows continuing.

The Inflation Question

  • Since the Global Financial Crisis, inflation has never really reared its head – but its shadow still stalks investors’ minds. The degree to which it picks up is a key question for 2021.
  • US markets have moved to price in higher inflation and, with 10-year break-evens at over 2%, much of the move has already been priced in. That said, risks still look to the upside and investors concerned over this prospect can consider TIPS.
  • EMs look less well protected. The PriceStats® indicator highlights considerable upside risks to inflation but break-evens on the Bloomberg Barclays EM Inflation Linked 20% Capped Index have remained in a range for the past six months.

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