The year 2019 was enormously positive for those investors who kept calm, since almost all assets achieved returns well above what was expected at the beginning of the year. In the case of double-digit debt and with returns in half the world close to historical lows, it seems like an impossible mission to have a year as positive as 2019 and even be able to scratch something, given the desert of returns that lie ahead of this asset .
Blackrock analysts have calculated the movements that the debt would have to undergo throughout this year in order to achieve the result achieved in 2019 and, to achieve this, it would be necessary to crush the historical lows marked in recent years. At a global level, fixed income gave a return of 6.8% last year and to achieve this in 2020, its profitability would have to drop to 0.69%, compared to the 1.3% in which it currently moves and record low of 1.07%. In the American bond, its interest would have to fall to 0.98% to match the return of 7% last year and to obtain 5% it would have to reach 1.27%, from the current 1.59%.
What debt must do to repeat the year 2019
“We think the outlook on fixed income in 2020 boils down to whether it will be able to remain effective and rule out a global recession and we think so… However, valuations have widened and with credit spreads narrowing and risk-free rates at such low levels, there is hardly any room in some countries to lower rates and compensate for the increase in spreads,” they point out in Janus Henderson.
The start of the year has been positive for debt -fixed income in euros gains 2% and in dollars, 1.7%- given the doubts about the weakness of the global economy and the news about the coronavirus, but the experts they consider that it is increasingly difficult to win, especially in the government.
“Global sovereign bonds have priced in a sharp slowdown in global activity. Inflation expectations in developed economies remain significantly below central bank targets and short debt is pricing in further rate cuts… If the virus is contained and its blow is reduced to the first quarter of the year, our underlying thesis of a better year for corporate debt than for sovereigns would remain intact.
In European sovereign debt, the return would have to go to -0.65% to match what was achieved in 2019 and to -0.87% to obtain that 5%. Meanwhile, the Spanish bond achieved a total return of 11% in 2019 and to repeat this year it would need to place its yield at -0.56%, compared to the historical minimum of 0.035%. “After a summer in which everything revolved around lower rates for longer and with expectations of a rate cut taking debt to record lows, in 2020 the risk could be on the upside. If the market does not put in its expectations of more rate cuts and counting on some rise in the medium term, a timid rise in yields could take place”, they argue in Natixis.
In credit, the investment grade in euros barely gives a return of 0.36%. In order to earn 5%, the interest would have to drop to -0.3% and repeating last year’s success seems like an impossible mission, since it would need to go back to -0.48%. In investment-grade debt in dollars, the return is positive -2.6%-, although it is true that the price of covering the currency would bring interest to levels similar to those of credit in euros.
Protects but does not rent
One of the problems that investors face in the low interest rate environment is that if fixed income had never been fixed, now it does not offer that income either -or it is very scarce. “Despite yields being at record lows, we think that government bonds will continue to serve their purpose in a portfolio, that is, going up in price when stocks go down,” they say from JP Morgan AM. However, in the manager of the American bank they remember that “although it continues to provide protection, it no longer offers real income. In fact, the negative returns in a large part of the European market imply that investors must pay for the bonds that serve as insurance , which puts investors in a difficult dilemma”.
One of the problems that investors face in the low interest rate environment is that if fixed income had never been fixed, now it does not offer that income either.
All in all, investors do not seem to be very worried about this circumstance and . According to Bernstein data, in the first 4 weeks of the year there were inflows of 72,000 million dollars in fixed income funds, which is the record of the historical series. “Central banks continue to report their commitment to continue supporting their accommodative policy, which has caused downward pressure on debt yields and support in money flows,” they indicate from the analysis house .
For now, the market is discounting an additional rate cut in the United States at the next meeting in September and expects a second cut to come between the end of this year and the start of the next. In contrast, in the eurozone, investors still do not see any more drops in the price of money, but they do consider a downward movement more likely than an upward movement. With this protection from the central banks, analysts believe that investors rule out that a crash in the debt markets could come. Markets appear to have embraced Jerome Poweel’s commitment to act aggressively in the event of a slowdown, with equities near record highs and debt yields exuberantly low.
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