The backdrop of strong growth and questions over how the inflation story plays out mean we continue to lean toward short-duration/high-yielding strategies such as EUR and USD high yield and emerging market hard currency.
The question of inflation
The question of the moment, for investors, is inflation. Central banks’ rhetoric clearly suggests a view that the spike in CPI is the transitory impact of higher commodity prices and temporary distortions from impaired supply chains all acting on unfavourable base effects. However, market participants seem less convinced and appear unsettled by the apparent complacency of central bank officials.
While base effects will act to draw CPI lower during the second half of the year, there remain some pretty powerful forces acting in the opposite direction, not least the massive monetary and fiscal stimulus that continues to feed the demand side of the economy. Supply chains are not yet back to normal and, as a result, many surveys point to strongly rising prices.
The derived 1-year 1-year forward rate of US inflation (Figure 1) has come off its highs, suggesting the market is a little more sanguine that recent upside surprises have run their course.1 However, the implied rate remains around 2.5%, which is in the range seen prior to the 2008 financial crisis rather than the post-crisis norm.2 If inflation does prove more persistent than is widely believed, then there could be another leg higher for US yields. Indeed, European yields have also been rising, playing catch-up to their US counterparts as the better economic news gets priced into its bond market.
Implied 1-Year Rate of Inflation in 1 Year
Source: State Street Global Advisors, Bloomberg Finance L.P., as of 20 May 2021.
The backdrop of strong growth and questions over how the inflation story plays out mean we continue to lean toward short-duration/high-yielding strategies such as EUR and USD high yield and emerging market (EM) hard currency (see the Q2 2021 Bond Compass for details).
These strategies have performed well year to date, limiting the impact on performance of rising government yields through their short-duration exposure. For instance, the Bloomberg Barclays 0-5 Year U.S. High Yield Bond Index has an option-adjusted duration of just 1.82 years, meaning its price sensitivity to rising rates is less than 1/4 of that of the Bloomberg Barclays U.S. Corporate Bond Index.
Even in the event that inflation proves transitory, it is hard to see a meaningful rally in global rates given the strong growth backdrop and still extremely high levels of government issuance. Limits to capital appreciation means focusing on yield for returns. US high yield bond funds typically deliver in excess of 3% yield to worst, while the Bloomberg Barclays Euro High Yield Bond Index and the ICE BofA 0-5 Year EM USD Government Bond Index both have a yield to worst of more than 2%.3
The high yields on offer mean that these ‘risk assets’ have a spread to the government bond curve and this proved an effective shock absorber to higher underlying yields. For example, the Bloomberg Barclays Euro High Yield Bond Index started 2021 with a spread of around 325bp, which has subsequently narrowed to 290bp, meaning around 35bp of the rise in government yield was absorbed by spread compression.
The clear counter-point to this is that spreads are tight on a historical basis and that equates to low levels of compensation for credit risk. Widespread policy and legislative support for companies throughout the COVID pandemic has resulted in very low bankruptcy rates. This justifies tight current spreads but there are risks that these rates start to rise as supportive measures are gradually peeled back. However, strong economic growth should create a positive backdrop for earnings, which have been strong, while the low rates and demand for higher-yielding credit have allowed even some of the lowest-rated companies to engage in balance sheet strengthening.
The coming few months will hopefully see the clouds surrounding the inflation outlook clear. Until there is more certainty that inflation will indeed revert to levels more consistent with what central banks view as sustainable, upside yield risks exist for fixed income markets. With this in mind, remaining short duration should provide a degree of protection to investors, with returns coming from yielding strategies such as high yield and EM debt. This approach entails credit risks but the global backdrop of strong growth, which could spread to EMs as vaccination rates rise, should act as a stabiliser.
US Bankruptcies Have Fallen Back
Source: Bloomberg Finance L.P., as of 21 May 2021.
How to play these themes
Investors looking to access the themes described above can do so with SPDR ETFs. To learn more about these ETFs, and to view full performance histories, please click on the linked fund names below.
Source: Bloomberg Finance L.P., for the period 13-20 May 2021. Flows are as of date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
1The implied 1-year rate between the 1-year and 2-year US inflation swap. Source: State Street Global Advisors, Bloomberg Finance L.P., as of 20 May 2021.
2The average based on monthly data since 2008 has been 1.82%. Source: Bloomberg Finance L.P., as of 20 May 2021.
3The Bloomberg Barclays US High Yield 0-5 Year (Ex 144A) Index has a yield-to-worst of 3.65%, the Bloomberg Barclays Liquidity Screened Euro High Yield Bond Index of 2.58% and the ICE BofA 0-5 Year EM USD Government Bond Index of 2.03%. Source: Bloomberg Finance L.P., as of 21 May 2021.
Information Classification: General Access.
For professional clients use only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400. F+49 (0)89-55878-440.
Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
France: This document does not constitute an offer or request to purchase shares in the Company. Any subscription for shares shall be made in accordance with the terms and conditions specified in the complete Prospectus, the KIID, the addenda as well as the Company Supplements. These documents are available from the Company centralizing correspondent: State Street Banque S.A., Coeur Défense - Tour A - La Défense 4 33e étage 100, Esplanade du Général de Gaulle 92 932 Paris La Défense cedex France or on the French part of the site ssga.com/etfs. The Company is an undertaking for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS in accordance with European Regulations. European Directive no. 2014/91/EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France.The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214-2-2 of the French Monetary and Financial Code.
Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semiannual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.
Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Web: ssga.com.
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Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution.
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This sales brochure does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Securities offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation.
Italy: State Street Global Advisors Ireland Limited Milan Branch (Sede Secondaria di Milano) (“State Street Global Advisors Milan Branch”) is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Milan Branch is registered in Italy with company number 10495250960 - R.E.A. 2535585 and VAT number 10495250960, and its office is located at Via Ferrante Aporti, 10 - 20125 Milano, Italy. Telephone: (+39) 02 32066 100. Facsimile: (+39) 02 32066 155.
Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions.
Norway: The offering of SPDR ETFs by the Companies has been notified to the Financial Supervisory Authority of Norway (Finanstilsynet) in accordance with applicable Norwegian Securities Funds legislation. By virtue of a confirmation letter from the Financial Supervisory Authority dated 28 March 2013 (16 October 2013 for umbrella II) the Companies may market and sell their shares in Norway.
Spain: State Street Global Advisors SPDR ETFs Europe I and II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. Before investing, investors may obtain a copy of the Prospectus and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of State Street Global Advisors SPDR ETFs Europe I and II plc from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain or at spdrs.com. The authorised Spanish distributor of State Street Global Advisors SPDR ETFs is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores).
For Investors in Switzerland
The collective investment schemes referred to herein are collective investment schemes under Irish law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual reports free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstr. 19, 8027 Zurich, as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at spdrs.com.
United Kingdom: The Funds have been registered for distribution in the UK pursuant to the UK’s temporary permissions regime under regulation 62 of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019. The Funds are directed at 'professional clients' in the UK (as defined in rules made under the Financial Services and Markets Act 2000) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Funds, and compensation will not be available under the UK Financial Services Compensation Scheme.
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Informations relatives au Mexique
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