29 January 2021
At GAM Investments’ latest Fixed Income Meeting, held on 26 January, our investment experts discussed inflation, fiscal sustainability and the US housing market.
Rahul Mathur – Global Rates
A recent steepening in the long end of the US treasury yield curve signalled expectations of higher inflation and interest rates. It also reflected anticipation surrounding Joe Biden’s fiscal announcements and overall enthusiasm for the US growth outlook. Ultimately, we expect US interest rates and inflation to be driven by global developments. In our view, we are past the peak of surprise US fiscal stimulus announcements and it remains to be seen whether Joe Biden’s USD 1.9 trillion stimulus package will be adopted in its entirety.
Michael Biggs – Global Macro & EM Debt
We expect global GDP growth to strengthen in 2021, led by the recovery in China and the increased production of goods. This is consistent with US dollar weakness and would benefit emerging market (EM) currencies. Broadly speaking, risky assets started to rally from March last year, however genuine indicators of growth (such as dividend expectations) and also the risky assets most closely linked to growth (such as EM FX and EM high yield (HY) bonds) only started to rebound in November after the US elections. We have seen a further increase in dividend expectations in January, but HY spreads have essentially moved sideways and EM FX has deteriorated with US dollar strength. The underlying story remains the same; GDP and dividend expectations are still not back to where they were a year ago and therefore, in our view, there is more scope for upward revision, led by the global goods sector. We believe this should benefit EM local currency debt.
Florian Komac – European Credit
Europe is still gripped by various lockdowns and uncertainty over unknown Covid-19 variants persists. This week we have seen the International Monetary Fund (IMF) reduce the growth outlook for the eurozone by 1%, which is negative for major economies. Alongside this, there is an increased chance of instability in Italy due to the prime minister, Giuseppe Conte, standing down. News from the European Central Bank (ECB) however, is somewhat positive. The central bank has assured that financial conditions will be favourable and that risks from loan defaults in the banking sector are to be closely monitored.
Tom Mansley – Mortgage Backed Securities
The US savings rate is enormous and is only set to increase due to the next round of expected fiscal stimulus. As a result, household debt is at its lowest in 20 years. Interest rates remain low and therefore many people are securing fixed-rate mortgages. Even if inflation was to rise, we expect this to benefit residential mortgage-backed securities (MBS) as asset values would increase.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.