Thanksgiving, Post Election - October 24, 2019Submitted by The Fixed Income Group on October 25th, 2019
Happy post-Thanksgiving and happy post-Election - we hope you enjoyed both events!
In our last email we noted the ongoing volatility of the yield curve.
NOTE: Over ¼ of the worlds fixed income market has moved into negative yields.
The central competing arguments are; Slowing global growth vs Global growth bottoming.
Central banks have again begun quantitative easing. This includes negative or lowering of rates in order to soften potential slowdowns, diffuse economic uncertainty and counter trade conflicts. There is a consensus among chief economists that more rate cuts are likely.
These competing arguments continue to cause rate volatility - almost daily. We are of the opinion that this will be a trend for the next several months. At one period last month we witnessed a rate spike of nearly 25 bps or a quarter point increase.
During that period we were able to invest in a 5 year fixed-floater range note at 5% with a 6 month call feature. The note was called and the clients return was 5.65% return in less than a year.
Global leading economic indicators continue to decline. Trade continues to weigh on business sentiment and growth expectations. Eurozone is seeing broad declines in both manufacturing and service sectors while U.S. manufacturing saw its worst reading since 2009. In fact the manufacturing numbers indicate a recession in that sector. Germany, the largest EU economy and 4th largest in the world, is now in negative economic territory. Trade wars continue – US vs EU, US vs China, Brexit may be nearer but will lead to only the start of renegotiating new deals.
U.S. Fed still has room to cut. For the first time in 39 years, the U.S. has the highest policy rate of any developed country and there is certainly room for the central bank to stimulate further should the underlying economic data continue to deteriorate or the orange squirrel tweets about his superior economic knowledge!
Value back in favor? Value stocks outperformed growth stocks by almost 4% in September. Perhaps investors have started to look beyond the negative market sentiment and weak economic data, and now see monetary stimulus eventually re-accelerating global growth.
Conclusion: Despite strong employment numbers, low inflation and decent corporate earnings, the central banks are wary of a potential recession and/or flat economic growth. As well, certain political figures appear to be impacting economic decisions.
Considering the economic variables at play described above, including negative interest rates and deficit spending, we strongly suggest clients take advantage of spikes along this bumpy ride and consider the SUBSTANTIAL YIELD potential pickup in RANGE NOTES.
Please contact us if you have any questions.
Serving Municipal clients since 1995
Percy Rosenberger, CIM John Hancock
Senior Investment Advisor Senior Investment Advisor
604 443 5431 –Direct 604 443 5425 - Direct
778 995-9259 – Cell 604 228 5401 – Cell