Markets have received a boost from the US election result and positive developments surrounding a coronavirus vaccine over the past few weeks. Amid this flurry of good news, different segments of the global fixed-income market have responded in a variety of ways.
Both high-yield and investment-grade credit yields recently touched all-time lows (see figure 1). Investors are increasingly wondering whether it would be more accurate to term junk bonds ‘higher yield’ credit as spreads sank back towards 450bps this month (they reached almost 1,100bps at the peak of the March sell-off).
Figure 1. Yields hover at all-time lows
Source: ICE Bond Indices, as at November 2020. Past performance is not a reliable indicator of future results.
These ultra-low yields have been driven by unprecedented levels of central-bank support, a large increase in savings and the reach for spread – and rising demand for fixed income – that has taken place in the context of an uncertain macroeconomic backdrop.
There are clearly multiple forces pulling the market in opposite directions. The upcoming vaccine, outcome of the US election and hopes for a cyclical recovery are providing some upside. But on the other hand, lockdowns will continue to depress economic activity and exacerbate volatility.
It has been a year like no other – and one that will have far-reaching implications for the structure of the fixed-income universe. As yields sink ever lower, the ability to deliver alpha becomes even more important – something we believe can be achieved through a combination of top-down risk allocation, bottom-up security selection and a consideration of environmental, social and governance factors.