Miles Capital, Investment Advisor
January 13, 2020
The massive dynamics of global growth and trade were again center stage for the quarter, but there were some important differences. The markets saw a much improved tone to trade as the news hit of at least a potential completion to Phase One of the deal with China soon. Additionally, the positive momentum on the USMCA deal with China and momentum was well received. The Federal Reserve's (Fed's) rate cuts in the third and fourth quarters had pronounced effects upon the economy and the financial markets. The Fed also indicated they would probably be inclined to stay on the sidelines for a period, unless prompted by higher inflation. These actions drove positive business momentum, increased corporate issuance, and generally very positive returns in both the fixed income and equity markets for the fourth quarter.
Shorter maturity treasury rates (shorter than 3 years) moved lower for the quarter due to the Fed rate decreases. The outlook for global growth improved slightly, and the Fed's stated willingness to let inflation run above their long-term target for a period of time, helped push longer interest rates higher, with the 10-year U.S. Treasury rising 24 basis points to 1.92 percent. The increases in longer rates eliminated pockets of yield curve inversion. Shorter maturity rates are now no longer higher than longer maturity rates, which normalizes the slope of the curve and somewhat lessens concern of a potential economic recession. For the year, interest rates dropped strongly across the entire maturity spectrum.
Many sectors of the investment grade markets performed very well in 2019, including corporate bonds, government-backed mortgage bonds, municipal bonds, and treasury securities. The Bloomberg Barclays Aggregate Bond Index (Agg), a broad measure of the investment grade taxable U.S. Bond market, rose by 8.7 percent for the year. The average return for the Agg index over the past decade has been 3.74 percent.
Gazing ahead, a repeat of this fixed income performance will be difficult to achieve in in 2020, solely due to the magnitude. But we believe our clients could still see quite reasonable performance simply based on the Fed hold on rate action pending higher inflation.