22 Oktober 2019
This year, a series of geopolitical shocks have hit business sentiment in an already aged expansion. However, these shocks have been tempered by an almost universal adoption of easier monetary and fiscal policies.
On the US-China trade front, tensions have ratcheted up during the past few months. And in politics, turmoil persists in the US and UK.
A stall in global profit growth, due to margin compression over the past year, has amplified the downside risks. Keeping dry powder could be a solution for uneasy times.
Against this backdrop, investors should stay nimble in liquid instruments. While euro short bonds and bills are very negative, the US market enjoys both positive and higher yields.
Outside of the repo market travails, the 1–3 month T-Bills appear to be a viable option for USD portfolios and those investors who view the dollar as well anchored at its current level for the medium term.
For investors looking for a slightly longer duration, the 1–3 year US Treasury part of the curve also offers a relatively attractive yield.
How to play this theme
Market expectations in 2019 have shifted from Fed tightening to easing and, potentially, to ample loosening at light speed. Last week, the OECD lowered its forecast for global growth from 3.2% to 2.9% in 2019 and 3.4% to 3.0% in 2020.
This deteriorating landscape has led bond yields across G6 countries to fall dramatically, and they could remain anchored at these levels with further accommodation on the horizon as, according to the OECD, “the effectiveness of monetary policy could be enhanced by stronger fiscal and structural policy support”.
In this environment, and despite two hawkish cuts from the Fed, the market expects further moves: the Fed may be forced to cut on further weakening economic data.
In a more adverse scenario, US Treasuries could potentially provide a safe haven, and 7–10 year maturity bonds, with duration of 6.9 and yield to maturity of 1.8%, are an interesting yield versus duration trade-off for performance. We also saw some appetite from institutional investors over the third quarter.