Developments in the Fixed Income Space | Mackenzie Investments

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2016 Q2 Outlook

Developments in the Fixed Income Space

Developments in the Fixed Income Space

Steve Locke, Lead of the Mackenzie Fixed Income Team, explains how recent developments in the fixed income market have influenced his strategy for the second quarter.

Show transcript

As 2016 began, bond markets continued to play-out some of the flight-to-quality themes established last year. 

First, the rate hike and hawkish tones sounded by the Federal Reserve in December were not embraced by bond markets, and marked a divergence in policy with other major central banks, including the Bank of Canada. US Treasury yields fell sharply throughout January and the front end of the US yield curve priced-out all but a single rate hike from the Fed over the next two years. This stood in contrast to the Fed governor’s own median projection of four hikes in 2016. 

Market-based measures of inflation expectations also fell in sympathy with energy and commodity prices. Most developed economies have experienced declining headline inflation rates over the past year, although in many cases core inflation rates are higher because they exclude energy and food prices.

To start the year corporate credit spreads continued on a widening trend reflecting concerns with potentially lower global growth rates. The energy sector, which along with materials is a significant component of the high yield market, began to see a rising default rate. Credit markets only remained open for higher quality issuers.

The market stabilized during February as the promise and potential for more accommodation by the ECB combined with speculation that the Fed would back-down from more rate hikes in the near term. Economic data in the US remained reasonably good into March and the ECB delivered with a strong package of measures. Corporate bonds have since responded with a narrowing of yield spreads, reversing much of the volatility experienced in January and February.

During the quarter we added to investment grade corporate bond exposure to take advantage of opportunities. Our allocations to high yield bonds and loans remain below maximum and we are selectively adding to exposure at these wider spread levels.  Our portfolio durations are neutral and overall we expect that yield curves will remain in a low range. 

For more on our Q2 Outlook, please read the April issue of Mackenzie Express.

Key Points

  • Corporate credit spreads continue to widen, reflecting concerns with potential lower global growth rates
  • Good economic data from the U.S. and the ECB have led to corporate bonds narrowing their yield spreads and reduced volatility
  • Yield curve expectations for the next quarter