Fixed Income

Following the US election, we have seen bond rates continuing to increase, a stronger US dollar, firmer commodity prices, and a US stock market at all-time highs. Is optimism around the US President-elect’s fiscal expansion masking the true deflationary picture?

We expect Italian assets to underperform until it becomes clear who will be able to form and lead a new government. Nevertheless the outcome of the referendum was already priced into financial markets.

October was another difficult month for Global credit markets, in particular for Investment Grade bonds. By contrast, more risky High Yield bonds outperformed.

Neither Brexit nor Trump’s win was an accident – ‘the people’, in particular the working and middle classes, are purposefully and deliberately giving the political elites a thump on the nose.

USTs ended lower in October. Better US economic data and a hawkish statement from the Federal Open Market Committee (FOMC) bolstered expectations of a December interest rate hike.

USTs ended September mixed. While the Federal Reserve left interest rates unchanged and the Bank of Japan reinforced commitment to monetary easing, the ECB's lack of new stimulus disappointed the market.

It has continued to be a wild roller-coaster ride for investors, and unfortunately, it is not likely to be very calm for the foreseeable future. Investors must keep a keen eye on geopolitical risk and be ready to act if such appear to accelerate into a situation that could significantly impact markets.

QE policies have had a material impact on bond yields and valuations. We believe that the evolution of these policies will be more important than fundamentals in indicating when bonds can break the cycle of ever-declining yields.

Central bank policy from the US, Japan and Europe are strongly affecting the current global fixed income markets. New Zealand and Canadian economies also face continued pressure.

USTs ended marginally lower in August as the market adjusted to the possibility of a Fed rate hike, buoyed by sustained resilience in the labour market.

Many market commentators have been speculating that we are finally coming to the end of the bond rally that has endured for the past 35 years. It's worth noting that this is nothing new—we have heard similar suggestions many times before over recent years.

In developed markets, global bonds have benefited from recent flows out of Japan into positive-yielding markets. The New Zealand and Canadian economies face continued pressure and a September US rate rise is now looking more unlikely.

US Treasury (UST) yields ended July mixed: yields of shorter maturities climbed, whilse those of longer maturities fell.

The major consideration for markets in June was the Brexit vote in the UK. Although we are sceptical about the most pessimistic scenarios for the UK, there will be some negative impact on growth.

US Treasury (UST) yields gained in a volatile mon across asset classes. The US Federal Reserve (Fed) scaled back projections for raising interest rates, while the UK voted to leave the EU by a 4% margin, surprising markets.

Emerging Market reforms won't stop or pause with the current market recovery.

Following our analysis of the recent UK vote, our Emerging Market debt team in London discusses Brexit's potential ramifications for this asset class.

The immediate fallout from the Brexit win has been a strong flight to safety. US Treasuries rallied with the UST 10-year yield down to 1.44%, lower by 31 basis points (bps) on 27 June 2016.

Uncertainty after Brexit vote, but the correction in valuations and market volatility could provide buying opportunities in some fundamentally strong credits.

Although it is still too early to determine the full implications of Brexit over the longer term, in the short term, we can expect significant market volatility as uncertainty prevails, but this does not mean that investors should panic.

US Treasury yields remained largely unchanged in May. The impact of a disappointing US payroll figure was offset by the release of the US Federal Reserve’s April meeting minutes, which revealed that most policymakers favoured a rate hike in June should the US economy continue to improve.

Continued easy monetary policy in Europe and Japan will be supportive for global interest rates, but the case for further limited rate hikes in the US remains in place for 2016.

Our oil experts in London and New York update their bullish views in January with new facts, while retaining their positive intermediate-term view on oil prices.

Our global rates and currencies strategist in Australia lays out his dovish Fed scenario as an alternative to our house view. In it, he expects the Fed to wait until September or later to raise rates, and states his case that the Fed’s actions do not affect US bond yields.

US Treasury (UST) yields rose in April, as hopes of stabilization in the Chinese economy underpinned demand for riskier assets.

Our Chief Global Strategist explains the reasons why there is too much unjustified pessimism about Abenomics.

Our Asian currency expert discusses the potential ramifications of the increasing CNY-orientation for Asian currencies.

What is more important for credit spreads in the current environment: the fundamentals or central bank actions? Our research suggests that since 2010 the answer has been central banks and, in particular, the US Federal Reserve.

For the next 12 months, we are quite positive on performance prospect for global credit, singling out five investment themes.

Nikko Asset Management's Global Investment Committee met on March 29th and updated our intermediate-term house view on the global economic backdrop, central bank policies, financial markets and investment strategy advice.

We expect June and December Fed hikes, but only mild further easing ahead for the BOJ and ECB. Meanwhile, we expect oil prices to creep higher through 2016 despite the stronger USD due to relatively firm economic developments in China and the G-3.

We expect that global equity and bond investing will be positive for Yen based investors due to Yen weakness, but for USD based investors, we are taking only a neutral stance on global equities due to a cautious forecast for US equities, whereas we are positive on Asia-Pac ex Japan, Japan and Europe. Meanwhile, we are moderately negative on bonds in each region when measured in USD terms, so we underweight them.

While a recession in the US is not our base scenario, the impact of such an event on credit exposure is worthy of consideration. In our historical analysis we've found that the driver of past recessions can provide important insight into which credit maturities are most attractive.

US monetary policy grows less independent as 2016 unfolds and risks to global growth abound in a rebalancing China, a deflationary struggle in Europe and whispers of a Brexit.

Our Global Credit staff in London detail their rationale behind concentrating on service sector exposure globally.

Unfortunately for the soundness of the sleep among BOJ-watchers, Mr. Kuroda believes that surprising the market is the best way to achieve his intended result.

Our London and US analysts review oil prices from the supply and demand angle and they note that global demand growth remains high while global supply is narrowing, indicating that oilfs price swoon could be over.

Our Singapore fixed income team expounds on the outlook for this clearly globally important factor.

John Vail reflects on the Fed decision and the path forward. The Fed was even more dovish than apparent in the headlines.

Nikko Asset Management's Global Investment Committee met on December 8th and updated our intermediate-term house view on the global economic backdrop, central bank policies, financial markets and investment strategy advice.

We only expect mild further easing ahead, especially as the ECB does not wish to cause a rupture while the Fed is hiking rates.

We forecast that Asia Pac ex Japan, Japan and Europe will outperform in the next six months, while the US should underperform and, thus, deserve an underweight stance vs. all other regions.

As we enter 2016, we believe the divergent monetary policy theme will continue -- with the major risk to global bond markets and Fed rate rises continuing to be Europe.

The IMF's decision to include the Renminbi into the SDR is a major push for the RMB to become one of the world's major reserve currencies.

Our lead Australian fixed income portfolio manager discusses her intermediate-term outlook for the bond market “down under.”

A better supply/demand balance in Europe, outperformance of “high yield“ globally, positive event-risk in the telecom sector and opportunities in local currencies, as well as other credit related investment themes, all present interesting opportunities for generating positive returns, even in a challenging environment.

Our Nikko Asset Management fixed income experts, led by Simon Down, discuss the prospects for commodity currencies.

The internet revolution is coming to the financial sector, addressing inefficiencies in current system and business models. In China’s case we are witnessing a combination of financial liberalisation with an internet revolution in the financial sector.

Even though the current term premium on US Treasuries seems too low, it is unlikely to rise significantly unless offshore bond yields start to rise.

While RMB weakness will likely persist for a few months, we don't expect the currency to devalue more than 10% versus USD and we maintain our confidence that the currency will be included into the IMF SDR basket in a year from now.