2016 Q4 Outlook
Fixed Income in Q3 and Beyond
Steve Locke, Lead of the Mackenzie Fixed Income Team, discusses how summer 2016 unfolded in terms of interest rates, credit and fixed income. He also discusses how developments in each market have impacted his plans for Q4.
Q4 Outlook: Fixed Income in Q3 and Beyond
Steve Locke, Lead of the Mackenzie Fixed Income Team, shares how developments in interest rates, credit and fixed income have affected his Q4 plans.
STEVE LOCKE: Well, Brexit was a major feature of the fixed income landscape and the market focus as we went from Q2 to Q3. And, in the immediate aftermath, there was a flight to quality trade which pushed yields lower in most developed markets. In fact, we hit the low yields for the year in early July, in most cases. So, in fact, as we've gone through the summer, yields have traded in a very low volatile range, about 20 basis points for the Government of Canada 10-year yield, for example, as we've gone through the end of August.
Well, for interest rate markets, one of the things that's changed really in the past couple of weeks has been a little bit more volatility, in particular around the long-end of the yield curve. Now, I think what's happening here is that some markets are starting to reconsider some of the monetary policy effects on the yield curve, including things like zero interest rate or negative interest rate policy, as well as the quantitative easing programs underway by major Central Banks. So, leading out of the gate here was the Japanese yield curve which steepened quite sharply in late August and early September. And, that's been followed on by other developed markets seeing curve steepening, affecting particularly the long end of the market.
Credit has actually remained pretty robust throughout the summer months. Coming into the summer, we had good strong returns, up around 10%, for example, for U.S. high-yield. And, that's really continued, and quarter-to-date through the second half of September, high-yield markets in the U.S. have returned just over 4% total return. So, pushing the total return for the year-to-date period, up to about 14½%. So, good strong returns there. Over the quarter, as well, and through Q3 so far, we've seen over 2½% returns from the loan market in the U.S. And, corporate credit in the investment grade side continues to perform well also.
Well, with all that strength we’ve seen in the corporate markets, including the high-yield market, we wanted to dial back a little bit of our exposure there as some areas of those markets have gotten a little bit expensive. So, as the last three or four months have gone by, we've gradually been reducing our allocation, in particular to high-yield debt. We've actually, though, increased our allocation to investment grade corporate debt, in the balance, leaving our overall corporate allocation about the same.
As we look forward, we think that there's going to be increased volatility around some areas of credit. And, we're looking to avoid those areas that are most overpriced to avoid the dips that may come.
For more information about this and what we're doing in our portfolios, please read the upcoming edition of Mackenzie Express.
- Markets are starting to reconsider some monetary policy effects on the yield curve.
- In the immediate aftermath of Brexit, there was a flight to quality trade, which pushed yields lower in most developed markets.
- There is a possibility of increased volatility around some areas of credit.