In our view, the current market environment is presenting numerous challenges to navigate, leading investors across the globe to seek new alternatives to enhance overall returns while mitigating volatility and risk.
LOW BOND YIELDS
In the years since the global financial crisis of 2008 and 2009, central banks across the globe have flooded capital markets with liquidity, driving government and corporate bond yields to historic lows. Accordingly, these instruments no longer provide sufficient current income to keep pace with growing liquidity needs or liability requirements, particularly when considering the potential for rising inflation.
TAPERING OF CENTRAL BANK SUPPORT ON THE HORIZON
Given the historically low level of nominal yields as well as recent improvements in global economic growth, rates have begun to rise. Importantly, this move in rates has been exacerbated by central bank activity, as the U.S. Federal Reserve appears poised to begin tapering asset purchases in the near term, with a full end to quantitative easing possible in the next few years.
While the Federal Reserve’s potential tapering of accommodative monetary policy does signal a return to more normalized growth in the U.S., the drawdown of this meaningful support will almost certainly lead to a further increase in Treasury rates and bond yields. As a point of reference, both instruments witnessed a significant rise in rates following the mere announcement of the Federal Reserve’s intentions – in just four months’ time, from the end of April until the beginning of September 2013, the 10-year U.S. Treasury rate increased by over 120 basis points or more than 70%, while the average yield on U.S. investment grade bonds increased by over 80 basis points, or more than 45%1.
Full PDF see here: BAM White Paper