Despite recent signs of accelerating growth and inflation in the global economy, central bank monetary policy remains very accommodative. Short-term rates are stuck near or below the zero-level across most of the developed world, and more than $8 trillion in sovereign debt still trades with negative yields. Even BB-rated Portugal can issue 2-year bonds at just over 50 basis points (bps) today, less than half the rate paid by 2-year on U.S. Treasury notes.
Not surprisingly, the proliferation of negative interest rate policies and central bank quantitative easing programs is bringing foreign investors onto U.S. shores. This week’s chart highlights the changing composition of foreign purchase activity in the domestic fixed income markets and its impact on credit spreads. Most notably, China has been selling U.S. Treasuries to help defend the value of its currency. On the other hand, foreign buying of U.S. spread sectors has gathered steam as the Bank of Japan (BOJ), European Central Bank (ECB) and Bank of England (BOE) purchase activity is crowding out investors from their domestic markets. Yields available for corporate and structured securities in the U.S. are attractive given the lack of investable alternatives elsewhere in the world.Key Takeaway:
Global central banks have succeeded in their attempts to push investors out the risk curve. However, withdrawing excess liquidity from the markets in an orderly fashion is likely to prove more challenging. The Federal Reserve was the first to move beyond ordinary forms of policy accommodation following the credit crisis and now is on the verge of being the first central bank to reduce the size of its balance sheet. The fundamental picture remains constructive for the U.S. economy in particular, but credit spreads have moved to a point which argues for caution during the remainder of 2017.
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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