Risk Off – Risk On – Or Something In between
As we have been reporting over the past few weeks, the broad trends of slower global growth, falling energy prices, deflationary concerns and the race to zero on sovereign yields have been the interrelated themes that have driven asset valuations and investor flows since the start of the year. From this perspective, a review of January’s performance metrics can provide some telling tales regarding investor psyche and risk tolerance. As the returns tables below indicate, fixed income has been one of the few asset classes that have broadly performed well on a global basis in January. On the heels of the push to multi-year, if not all time low yields around the world, most bond classes experienced strong positive returns, although few were able to record any excess returns. It seemed like ages since the consensus prognostication was for a 3% 10-year treasury, which gave way to a low to mid 2% expectation at the start of the year. However, instead of rising, we have seen a continued steady push to lower yields, as the 10-year fell 53 bps during January to lows last seen just before 2013’s taper tantrum. As shocking as it is to see a 10-year yield in the 1.60% range and a 30-year yield nearing 2.2%, these levels seem downright cheap to the euro sovereign curve, which trades between 36 and 60 bps for the core and between 1.4% and 1.5% for the periphery (Greece excluded). We would also be amiss if we did not mention the 37 bps in Japan and the downright confusing -17 bps offered in Switzerland for 10-years. From a total return perspective, the broad treasury index posted one of its strongest monthly gains in recent memory with a +2.6% total return, and the longer end of the curve higher by almost 10%. Total returns for the aggregate index were 2.1%, while corporate posted a 3% monthly total gain. High yield proved to once again be the laggard, with a 0.7% monthly gain, despite an average coupon in the 6.5% range. The longer duration profile of taxable municipals allowed that asset class to report a 3.7% gain, although municipals generally lagged the surging treasury market.