Global Bonds: Diverging Economic Stories Drive Returns

Though markets crept up slightly after the Fed rate rise announcement, the market reaction overall was muted, as the move had generally been widely anticipated

Shannon Kirwin 31 December, 2015 | 10:07AM
Facebook Twitter LinkedIn

Investors around the globe have been watching the US Federal Reserve closely since the start of the year as the central bank dropped hints about the possibility of its first rate rise since 2006. Finally, after the Fed’s December 16 meeting, Chairwoman Janet Yellen announced that the bank would raise the ceiling on its overnight lending rate by 25 basis points to 0.50%, with the plan to continue raising rates gradually over the months and years to come.

Adding to the pressure felt by many commodity-exporting economies, the oil price tumbled steadily

Though stock markets crept up slightly after the announcement, the market reaction overall was muted, as the move had generally been widely anticipated. In fact, the US dollar has strengthened by roughly 10% against the euro since the start of the year, in large part as a result of investors pricing in a hike in rates.

While the Fed’s move signalled cautious optimism about the US economy, the outlook for most other economies remained subdued. Both the British and Japanese central banks reaffirmed their commitment to quantitative easing amid disappointing inflation data. For most emerging markets, 2015 is on track to be a dismal year.

Coming on top of a spate of disappointing economic data from China, the Chinese central bank surprised markets in August by loosening the trading band for its currency, setting off a dramatic sell-off in its currency that quickly spread to other emerging market currencies such as the Mexican peso and Russian ruble. Adding to the pressure felt by many commodity-exporting economies, the oil price tumbled steadily $62 per barrel at the beginning of July to just $36 in late December.

Through to December 21, Morningstar’s Global Bond and Global Emerging Markets Bond categories had returned 5.5% and 6.2% respectively, driven primarily by those categories’ heavy US dollar exposure.

Which Bond Funds Delivered?

Within the Global Bond category, Bronze-rated Raiffeisen-Global-Rent has climbed to the top of the pack, thanks in part to its hefty USD stake, comprising roughly 45% of assets at the end of November. Invesco Bond, also rated Bronze, is likewise poised to end the year in the peer group’s top quartile, driven by its hefty exposures to both US dollar- and sterling-denominated paper, as well as stakes in Italian and Spanish sovereign bonds. Funds that tied their luck to the euro tended to take up the rear, such as Petercam L Bonds Universalis Unconstrained, which trailed the pack thanks to its roughly 50% euro stake and positions in inflation-linked bonds.

Within hard-currency emerging market bonds, Pictet Global Emerging Debt, rated Bronze, is set to post top-decile returns within its category, thanks to significant off-benchmark short positions in emerging market currencies, while Bronze-rated Templeton Emerging Bond was stung by sizable bets on the Brazilian real and other hard-hit emerging market currencies and significantly lagged its peer group.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Pictet-Global Emerging Debt I GBP325.59 GBP-1.46Rating
Templeton Emerging Mkts Bd A(acc)USD10.75 USD-0.73Rating

About Author

Shannon Kirwin  is a fund analyst with Morningstar