Global fixed income markets are pricing in yet another round of unconventional monetary policy from a major central bank. Expectations are high the European Central Bank (ECB) will pursue extraordinary monetary policy intervention when it meets on June 5. The ECB possesses a broad range of options, and global fixed income markets have already re-priced in anticipation of a major policy initiative.
At the security-selection level, the implications differ for each geographic market. Yet this is the latest reminder that unconventional policies in any one jurisdiction can affect global markets, given how intertwined the global financial system and economy have become.
In Europe, we believe fresh monetary stimulus will fuel a rally in peripheral government bonds and a modest sell-off (higher yields) in core-Europe. We continue to see select opportunities throughout the corporate market, and note issuers from the financial sector would likely benefit the most from stimulative monetary policy. In the U.K., the looming risk of changes to the Bank of England’s bias could create volatility and higher yield levels across the U.K. Gilt yield curve.
Higher relative yields in the U.S. versus Europe led to a recent rally in Treasury securities. We caution that complacency appears to be rising at a time investors should be more vigilant with regards to interest-rate risk. The real yield of a 10-year U.S. Treasury has fallen nearly 50 basis points (bps) this year and sits nearly 200 bps below the historical average. We prefer intermediate maturity bonds with fixedto-floating rate preferreds as attractive ways to enhance portfolio yield within the corporate sector.
Canada has not been immune from the rally on government bonds and tighter credit spreads. We believe investors should reduce the term of their bond ladders in acknowledgement of a worsening risk/reward trade-off. Within the preferred share space, investors should sell some preferred shares, in our view, given recent strength attributed to a supply-demand imbalance in the market that will likely prove temporary.