3 questions on fixed income for 3Q 2019
Our answers for three bond questions investors may ask.
The Fed on 31 July 2019 made its first rate cut in more than a decade as the US economy is losing momentum amid the country’s escalating trade tensions with China. The target range for the federal funds rate was lowered by 25 basis points to a range of 2.00%-2.25%1.
Days after the Fed’s move, US President Donald Trump announced his intention to impose a new 10% tariff on the remaining US$300 billion of Chinese imports. Certain products will face the additional tariff from 1 September 2019 and others delayed to 15 December 20194.
The Fed described the widely expected rate cut as “a mid-cycle adjustment to policy”, akin to the rate-cutting cycles of 1995 and 1998. It was largely seen as a precautionary effort, or an insurance cut, to protect the US economy against downside risks from weak global growth and rising trade tensions. Still, the Fed isn’t anticipating a prolonged cutting cycle.
With interest rates at current levels, valuations of US Treasuries, in our MAS team’s view, could be pricey and are unlikely to come down unless there is a significant increase in recession risk. As shown in the chart, 10-year US Treasury yield peaked at about 3.2% in November 2018 and has fallen relentlessly to 2.0% in July 2019, sending the price of 10-year US Treasury higher.
10-year US Treasury yield trending down2
As market uncertainties persist, investors seeking yield and portfolio resilience through government bonds may also consider other options such as agency MBS depending on their risk appetite.
Rolling one-year volatility5
12-month rolling average yield5
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With interest rates at current levels and heightened market volatility over escalating US-China trade tensions, it is important to build portfolio resilience with diversification6. Instead of focusing on just traditional government bonds, investors seeking yield could consider a conservative multi-asset strategy. This strategy seeks to balance returns and volatility of differing asset classes, and adopts a global allocation aimed at capturing different sources of income across sectors and regions.