by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equity markets weakened a bit last week, posting mixed results after news reports suggested that U.S. and Chinese leaders are unlikely to meet before the “trade truce” expires on March 1. Sentiment across markets has remained far more positive than it was at the latter end of 2018, with credit spreads declining to their lowest level since November. Government bonds also fared well as yields continued to decline. The yield on the 10-Year Treasury Note dropped to close the week at 2.63%, down from its high of 3.24% back in November.

 How Bond Investing Has Changed Since the Financial Crisis
In the world of finance, everything is interconnected, and sometimes it can be incredibly enlightening to take a look at how a change in one area of the economy can have long lasting impacts on global financial markets. The post financial crisis monetary policy environment (marked by artificially low interest rates and high liquidity) has influenced nearly every corner of the economy and the investing world.  One major byproduct has been a significant shift in the composition of major bond indices, particularly the Bloomberg Barclays U.S. Aggregate.  Over the past 11 years, the yield offered by the average bond in the index has unsurprisingly come down, but the average maturity has also grown longer. Those longer maturities have increased the duration of the index, which is a measure used by bond investors to evaluate how sensitive an investment is to changes in interest rates (see chart provided by JP Morgan Asset Management).

To understand what has transpired, we need to assess the decision making of bond issuers. Low interest rates mean low borrowing costs for corporations, and that provides an incentive for businesses to seek longer term financing (in order to lock in lower rates for a longer period of time). This has changed the mix of securities that make up the index, leading to a higher proportion of longer-term bonds. Passive bond investors should be aware of the changes in the composition of the underlying index being tracked, as the risk/reward outlook for the Bloomberg Barclays Aggregate has become less attractive (lower yields and higher rate sensitivity). In the context of the active vs. passive debate, the proponents of active management may have the strongest argument when it comes to fixed income, where an active manager may be able to manage the tradeoff between yield and duration more effectively.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Markets capped off one of the strongest Januarys on record with another positive week, bolstered by a change in rhetoric from Fed Chairman Jerome Powell (discussed further below). The bond market reacted positively to the Fed communication as well, with the 10-year treasury yield dropping to its lowest level in weeks. Internationally, the focus remains on the uncertainty surrounding the continued Brexit negotiations. British Prime Minister Theresa May has indicated that she would like to reopen the discussions which were finalized in November, but EU representatives have stated that the terms that were reached are legally binding. Currency markets have been most impacted by the continued back and forth, but it is likely that equity market gains have been held back as well. 

A Change in Tone
Last week, the Federal Reserve held interest rates at current levels and took a significantly more dovish tone in its communications. For markets, words like “patient” and “wait-and-see” represented a refreshing contrast from terms like “auto-pilot,” which was used in recent months when discussing the future path of monetary policy. It also seems apparent from the Fed’s communications that the change in tone had less to do with a shift in its view on the U.S. economy (which remains quite favorable) and more to do with the confluence of risks that have permeated in the global economy. From our perspective, it is also highly likely that the volatility in equity markets was a key influencing factor, even if it were not explicitly communicated during post-meeting comments.