Fixed income indexes in August had mixed performance. Despite continued quantitative easing across the globe, funds outflows from fixed income resulted in falls in some of the relatively expensive IGs.
The Bloomberg Barclays Global Aggregate Bond Index were down 0.15%, US Investment Grades lost 1.38%, while Emerging Markets US dollar Bonds and US High-yield bonds gained 0.54% and 0.95% respectively.
At the annual Jackson Hole Economic Symposium, Fed chair Jerome Powell gave a speech outlining the upcoming policy direction of the Fed. According to him, the Fed will shift the policy target from an inflation based one, to an employment and economy driven one, where inflation could go above the long term target of 2% without any reaction from Fed. Market interprets the statement as a guarantee for a low interest rates for an extended period, resulting in a much lower risk of rate hikes in the meantime, giving additional downside protection for bonds.
Moving forward, quality remains a key aspect with the difficult macroeconomic environment for businesses continuing, and we remain positive on quality Asian bonds with their better yield to risk trade-off due to the better operating environment in general. Investors should also keep governmental support in mind when selecting fixed income names, as these could cover potentially weaker businesses. As they are expected to expire sometime in the future, this could potentially expose investors to unnecessary risks.