Page 19 - ISQ January 2021

JANUARY 2021

2021 Fixed Income Outlook: Lower for Longer

Doug Drabik, Managing Director, Fixed Income Research
Nick Goetze, Managing Director, Fixed Income Services

Thirty-nine plus years of general interest rate decline, bills. Treasury yields have declined 30% on the long end and over
twenty-three years of moderate inflation, five recessions, 90% on the short end of the Treasury curve, creating an even flatter
and the longest expansionary period ever preceded 2020’s sloped curve during 2020.
pandemic-triggered recession, unprecedented central bank
intervention, and historically low interest rates. Fixed Just as all corners of the world have been impacted
income total returns have benefitted for years (if not by the global pandemic, so have all corners of the
decades) from general interest rate decline. There is an fixed income market as spreads, volatility, and rate
inverse relationship between rates and price. As rates levels have been affected.
decline, prices increase. The year 2020 was no exception as
Treasury, corporate and municipal bonds all boasted solid Pre-pandemic market conditions included record low unemploy-
total returns. ment along with moderate growth, and although poor economic
conditions did not trigger the recession, isolation, slowed consumer
MARKET CONDITIONS confidence and outright business shutdowns initiated an economic
ambush pushing 20+ million job losses, small business collapses
Just as all corners of the world have been impacted by the global
pandemic, so have all corners of the fixed income market as spreads, and a general sense of fear and uncertainty. The reliability and
volatility, and rate levels have been affected. The pandemic-induced sureness of a COVID-19 vaccine may largely dictate the pace of the
recession officially began in February and prompted significant recovery and the level of consumer confidence that leads us back
central bank (Federal Reserve (Fed)) and government response to measurable growth.
through fiscal and monetary actions. The Fed’s balance sheet,
which had begun the year with ~$4.1 trillion in asset size, has bal- LOOKING FORWARD
looned to over $7.2 trillion via implemented emergency lending The variables are numerous and atypical thereby challenging
facilities, bond purchase programs, and other stimulus-related forecasts on how the markets emerge in 2021. The base case sce-

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