Published on Jan. 28, 2020
Fourth Quarter 2019 | Fixed Income Commentary
During the fourth quarter of 2019, the investment grade intermediate term corporate bond market continued its positive momentum and returned about 1.1% to close out the year up approximately 10.2%. Similarly, the investment grade preferred stock market returned about 2% in the fourth quarter and approximately 17% for the full year. We believe that performance across fixed income markets was mostly driven by a decline in investment grade credit spreads and US Treasury yields as well as continued support from the persistent global demand for positive yield.
In our opinion, the Federal Reserve’s decision to reverse course earlier this year and take more accommodative monetary policy actions was responsible for the narrowing in credit spreads and decline in bond yields during 2019. After cutting its benchmark interest rate by 50 bps in the third quarter, the Federal Reserve made the decision to cut rates another 25 bps in October as well as restart asset purchases for balance sheet expansion. We believe that helping guide market participates into believing there would be no further interest rate hikes was Federal Reserve Chairman Powell’s comments in the latest Federal Reserve Minutes regarding no hikes until inflation was “persistently” and “significantly” above currentlevels and closer to its 2% target. The policy shift came after we saw synchronized global growth deceleration which we believe was caused by trade war headlines, uncertainties around Brexit, and global manufacturing sector weakness. In effect, the Federal Reserve curbed recessionary fears by re-igniting stimulus in order to sustain the U.S. economy’s tenth consecutive year of economic expansion.
The impact of the Fed’s actions is apparent to us through various reports of economic data that came in above expectations at the end of the year. Namely, the unemployment rate reached its lowest level in the past 50 years, housing data surprised to the upside, and consumer sentiment, as reported by the University of Michigan Surveys of Consumers, remains healthy. Moreover, as the U.S. is a consumer-driven economy it has thus far been resilient to the global manufacturing weakness happening elsewhere. We believe that these factors are all supportive for credit spreads, US Treasury yields, and thus bond prices in the near future.
While we do not expect a repeat of the double-digit returns experienced in 2019, our general view remains constructive for fixed income markets to continue to perform well going forward. We are less concerned about a magnified economic deceleration occurring in the U.S. in 2020 and believe current investment grade corporate fundamentals remain quite robust. Therefore, our positive outlook for 2020 is derived from the strength of investment grade corporate fundamentals, the Federal Reserve’s commitment to accommodative monetary policy for as long as necessary to sustain the current economic expansion, and the continued demand for positive yield from both international and domestic markets.