Page 20 - ISQ January 2021

INVESTMENT STRATEGY QUARTERLY

nario presumes that the vaccine is indeed effective and, equally World Bond Markets
as important, easy to quickly disseminate. This will initiate a rise 2-Year 5-Year 10-Year 30-Year
in consumer confidence and allow businesses to gravitate toward 0.119 0.354 0.923 1.659
their normal and intended business plans. Assuming much of the United States 0.221 0.432 0.721 1.264
Canada
recovery begins taking shape in the second half of the year, the France -0.707 -0.648 -0.331 0.377
intermediate and longer end of the curve will push higher in yield. Germany -0.705 -0.732 -0.565 -0.156
The 10-year Treasury, which will likely end 2020 around 1.00%, will Greece 0.107 0.651
creep higher in yield in 2021 to ~1.50%. The shorter end of the curve Ireland -0.609 -0.294 0.313
is directly influenced by the Fed. The implied Fed funds target rate Italy -0.421 -0.017 0.539 1.408
is projected to keep its lower band at 0.00% through 2023, thus Japan -0.119 -0.112 0.025 0.647
influencing 2021 where the 2-year Treasury rate projection will Netherlands -0.690 -0.700 -0.482 -0.087
remain relatively low at around 0.25%. These combined moves point Spain -0.625 -0.410 0.050 0.862
to a slight steepening of the yield curve over the course of 2021. Sweden -0.364 -0.293 0.038
United Kingdom -0.123 -0.046 0.257 0.829
We believe a more bullish scenario also exists for bonds (prices Source: Bloomberg LP, Raymond James: as of 28/12/2020
higher/yields lower). The world’s central banks (including the
Fed) have clearly taken the helm in controlling rates and driving shopping while consumers self-restricted their outside activities.
economies. Four primary central banks (Federal Reserve, European There are an equal number of industries that the pandemic trampled
Central Bank, Bank of Japan, People’s Bank of China) have ballooned on regarding employment and revenue numbers, such as airlines,
their balance sheets from a combined total assets of ~$6 trillion entertainment, transportation and health clubs. This supports an
before the Great Recession (2008-2009) to over $27 trillion today. argument for a more fragmented recovery.
This year alone, they have increased their combined asset size over
36%. The flood of money has helped to keep rates down. Increasing OPPORTUNITIES IN FIXED INCOME
domestic debt, which comes with higher interest expense, is an The emerging market space may experience a slower recovery. The
incentive for the Fed and the government to keep interest rates logistics for vaccine distribution include very specific temperature
down. In addition, world interest rates continue to exhibit great controls, a technology that may not be easily met for simple dis-
disparity versus US rates, which are significantly higher than many tributions in less high-tech equipped countries. That being said,
European and Asian rate environments. There is over $17.1 trillion emerging markets that are strongly positioned possess an oppor-
of negative yielding debt worldwide. This helps to drive demand tunity to benefit greatly from a pandemic turnaround. Flows will
for higher quality, higher yielding US securities, thus contributing likely remain very strong as investors seek opportunities to add any
as a headwind to higher rates. The thought that the US would ever kind of yield in an overall low-rate environment. Emerging market
enter the world of negative interest rates has shifted from ‘never’ oil companies may be one of the few sectors where spreads could
to ‘conceivable’ as global rates continue to drift apart. The Fed and still narrow, creating a positive total return chance. Higher risks will
government are likely to continue with additional stimulus packages accompany 2021 emerging market opportunities and, although
and persistence in keeping Fed funds at zero. In addition, there is a there will be pockets of dislocation, opportunities will exist for more
possibility that the COVID-19 vaccine takes much longer to distribute aggressive investors to capture higher yields, especially relative
and the hangover effects that have crushed certain businesses to the low interest rate strapped high-quality bond alternatives.
take much longer to recover. Under these circumstances, we see
a bullish scenario that could keep the 2-year closer to 0.00%, the Although fixed income total return prospects will be muted due to
10-year Treasury lower to ~0.50% and higher stock and bond prices. historically low interest rates with lessening bullish prospects, many
of our investors allocate to individual bond positions to meet the
Spreads have tightened across many product areas including primary purpose of principal preservation. Nothing changes here
investment-grade and high-yield securities. We anticipate that and this component remains a vital allocation to continue to protect
any recovery will not begin until the second half of 2021 and we hard earned wealth. Municipal and corporate issuance will likely
anticipate spreads to remain tight. It is worth noting that spread remain robust as corporations and municipalities take advantage
widening, and recovery in general, is likely to be segmented. of leveraging a low rate environment. The Fed has allowed a view
There are many businesses and corporations that have actually into the future with their proclamation of a zero interest rate policy
benefitted from COVID-19 consequences. These include companies through 2023. High demand for quality securities of the shortest
like Amazon and FedEx, which speaks to the increase in at-home maturities will continue to present the opportunity to reinvest those

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