The 2021 Fixed Income Outlook Where to Look, What to Do.
- Rates will be lower, and yield curves flatter, for longer. Investors must deal with this reality and plan for optimizing their portfolios accordingly.
- If you need return, you need to look outside Developed Market Government Bonds. Emerging Markets, especially China, and High Yield bonds are the key places to consider.
- Credit will be supported by central banks worldwide. We believe that will sustain spread products for some time.
Lower, Flatter Persists
The first point we need to make is that we think the interest rate environment we are now in is going to persist for a while. In the words of the song – ‘Now is Tomorrow’ and investors need to optimize for now. Lower rates and flatter yield curves are no blip.
What’s Wrong with Developed Market Government Bonds ?
Developed Market Sovereign Bond yields are likely to remain rangebound around historic lows, for some time, due to Quantitative Easing (QE). The US Fed, for example, is likely to maintain its policy rate at (or near) zero for the foreseeable future as it seeks to achieve its desired outcomes of lower unemployment and higher inflation.
In this environment, investors will increasingly need to turn their attention away from government debt to fixed income offerings that provide more substantial yields.