2018-02-06 BMCG Bond Market Outlook · Bond Market Outlook ECB Bond Market Contact Group ... 2,100...

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Neeta Madahar, Falling 1 (detail), 2005, Lightjet print mounted on aluminum, 48 x 48 inches (122 x 122 cm)

Bond Market OutlookECB Bond Market Contact Group

Wellington Management International Ltd

Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. The material and/or its contents are current as of the most recent quarter end. Certain data provided is that of a third party. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness.

6 February 2018Ella Hoxha, CFA Managing Director & Fixed Income Portfolio ManagerWellington Management International Ltd

Copyright © 2018 All Rights Reserved2001211018/470966_10/470966/470966A

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Market overviewTitle Line 24Q highlights

The US dollar continued its slide

Global Financial conditions eased further

Even though both Bank of England and Fed hiked….

Growth synchronised and at multi-year highs

But geopolitics dominates headlines

Continued curve flattening in the US gathered more attention….

Still little evidence of inflation

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Copyright © 2018 All Rights Reserved

Source: Bloomberg | Chart data: 30 December 2016 – 17 January 2018

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Market overviewTitle Line 2A bullish year for asset returns

2001209852/470966_7/470966/470966

12/16 2/17 4/17 6/17 7/17 9/17 11/17 1/181,700

1,800

1,900

2,000

2,100

2,200

2,300

40

45

50

55

60

65

70

MSCI World Index Total Return (LHS)

CL1 Oil futures (RHS1)

520

530

540

550

560

570

580

JPM Global Agg Index USD unhedged (RHS2)

MSCI World Index Total Return; CL1 Oil futures; JPM Global Agg Index USD unhedged

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Source: Bloomberg | Chart data: 2 October 2017 – 29 December 2017

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Market overviewTitle Line 2Flatter curves and tighter spreads

2001209777/470966_10/470966/470966

10/17 10/17 10/17 11/17 11/17 12/17 12/170.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

US 30 v 5 (LHS) EU 30 v 5 (RHS)

10/17 10/17 10/17 11/17 11/17 12/17 12/171.1

1.2

1.3

1.4

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

Spain 10 year (LHS)

Italy 10 year (RHS)

Portugal 10 year (RHS)

US and EU 30 vs 5 year yield spreads

Italian, Spanish and Portuguese’s 10 year spreads to bunds

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Source: Bloomberg | Chart data: 30 September 2017 – 29 December 2017

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Market overviewTitle Line 2Tighter credit spreads

2001209653/470966_7/470966/470966

9/17 10/17 11/17 12/170.8

0.9

1.0

1.1

Bloomberg Barclays EuroAgg Corporate

US Agg Corporate Avg OAS

US & European Corporate OAS

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Source: Bloomberg as of 17 January 2018

Market overviewTitle Line 2Different continents, different stories

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Steepening of Eurozone front-end curve Flattening in the US

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Source: Bloomberg | Chart range: 4 January 2016 – 31 January 2018

Market overviewTitle Line 2Magnitude of recent sell-off

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5-yr point has led the sell off

Front end has been on the move for more than a year

1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18-45

-30

-15

0

15

30

EU020510 currency US020510 currency

1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18-0.2

0.0

0.2

0.4

0.6

0.8

EUR and USD 2s5s10s EUR 2 y/y vs 6 mos Euribor Fixed

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Source: Thompson Reuters Datastream | Chart data: January 2001 – December 2017

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Macro backdropTitle Line 2Growth to surprise on the upside

Euro area GDP

2001206097/470966_14/470966/470966

1/01 2/03 3/05 4/07 5/09 6/11 7/13 8/15 9/1744

46

48

50

52

54

56

58

60

62

-12

-9

-6

-3

0

3

6

9

12Euro area PMI composite (LHS, % Q/Q, 1Q lag)

GDP annualized (RHS)

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Source: Thompson Reuters Datastream | Chart data: February 1998 – 3Q18

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Macro backdropTitle Line 2Employment to improve further

Euro area employment

2001206124/470966_10/470966/470966

2/98 10/01 1/05 4/08 7/11 10/14 1/1840

45

50

55

60

-4

-2

0

2

4

PMI composite employment (LHS, 1Q lag)

Employment % y/y (RHS)

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Source: Thompson Reuters Datastream | Chart data: January 2001 – February 2018

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Macro backdropTitle Line 2Slight tightening in financial conditions

Euro area monetary conditions

Looser monetary conditions

2001206128/470966_6/470966/470966

1/01 3/03 4/05 6/07 7/09 9/11 10/13 12/15 2/1843

48

53

58

63

3

2

1

0

-1

-2

-3

Euro area PMI composite (LHS) FMCI (RHS, 1m lag)

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Source: Thompson Reuters Datastream | Chart data: 1Q99 – 3Q17

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Macro backdropTitle Line 2But monetary conditions are very easy

Taylor rule (EMU)

2001206183/470966_14/470966/470966

1Q99 1Q02 1Q05 1Q08 1Q11 1Q14 1Q17-2

0

2

4

6

8

Taylor rule (CPI) Policy (%)

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Macro backdropTitle Line 2Inflation expectations

Source: Thompson Reuters Datastream | Chart data: 1 January 2003 – 3 December 2018

Euro area core CPI momentum and PMI capacity utilisation

2001220347/470966_11/470966/470966

1/03 4/05 7/07 10/09 1/12 4/14 7/16 10/18E40

45

50

55

60

65

-1.0

-0.5

0.0

0.5

1.0PMI capacity utilisation 4Q lag (LHS) Core CPI momentum (%y/y, RHS)

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Macro backdropTitle Line 2Major central banks are expected to reduce policy stimulus

2001206584/470966_7/470966/457187

1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18-50

0

50

100

150

200

250BoJ

ECB

Fed

BoE

SNB + CNB

Total

Monthly Fed, BoJ, ECB, and BoE asset purchases ($ bil)

Shaded data beyond January 2018 represent our estimates. Actual results may vary significantly from estimates. | Sources: Various national central banks, Wellington Management | Chart data: January 2008 – December 2018

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Copyright © 2018 All Rights Reserved2001214289/470966_10/470966/470966

2017 2018-500

0

500

1,000

1,500Total gross issuance (GBI)

GBI excl QE

GBI excl QE and re-invest

GBI excl QE, re-invest and redemption

2015 2016 2017 2018-0.4

0.0

0.4

0.8

G4 net issuance less QE (excluding re-investments)

Sources: European Commission, Bloomberg, National Debt Management Offices, January 2018

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Macro backdropTitle Line 2With shifting supply dynamics

EMU issuance excluding ECB flow (EUR, bil)

G4 net issuance less QE (excluding re-investments) (USD, tril)

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Sources: European Commission, Bloomberg, National Debt Management Offices, January 2018

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Macro backdropTitle Line 2Total issuance highest since 2015

2001214303/470966_14/470966/470966

2012 2013 2014 2015 2016 2017 20180

1,000

2,000

3,000

4,000

US UK EMU Japan Total

Gross soverign issuance NET o central bank purchases (including re-investments) (USD, bil)

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Bond market outlookTitle Line 2Burning questions for 2018

Will the ECB end QE?

Will the BoJ change its policy targets?

Will inflation finally emerge?

Who will buy additional supply?

Will the curve flattening theme continue?

Will the EU follow on a new virtuous path?

Will the melt up in risky assets continue?

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The output data presented are internal ratings based on the Wellington Management’s proprietary Sovereign Risk Framework. | For illustrative purposes only. Not representative of an actual investment. | Source: Wellington Management, January 2018

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Bond market outlookTitle Line 2QE has been powerful at lowering yields and risk premium for sovereigns

2001214309/470966_13/470966/470966

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

150 175 200 225 250 275 300 325 350 375 400

Perc

ent

Wellington Management Sovereign Risk Index

Germany

France

Italy

Spain

Austria

Belgium

Finland

Ireland

Netherlands

Portugal

Germany

France

Italy

Spain

Austria

Belgium

Finland

Ireland

Netherlands

Portugal

Germany

France

Italy

Spain

AustriaBelgiumFinland

Ireland

Netherlands

Portugal

Jun 2017

Jul 2017

Dec 2017

Euro area – Wellington Management Sovereign Risk Index and yields

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Copyright © 2018 All Rights Reserved2001227853/470966_14/470966/470966

150 175 200 225 250 275 300 325 350 3750

1

2

3

4

5

6

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Bond market outlookTitle Line 2cQE has been powerful at lowering yieldsv

Sovereign Risk Framework and yields (minus policy rates, %)

Non-QE countries

Dec 2017

Dec 2017

Dec 2016

Jul 2017

QE countries

The output data presented are internal ratings based on the Wellington Management’s proprietary Sovereign Risk Framework | For illustrative purposes only. Not representative of an actual investment. | Source: Wellington Management, January 2018

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The output data presented are internal ratings based on the Wellington Management’s proprietary Sovereign Risk Framework. | For illustrative purposes only. Not representative of an actual investment. | Source: Wellington Management, January 2018

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Bond market outlookTitle Line 2Nevertheless there is value in some

2001214314/470966_14/470966/470966

1

2

3

4

5

150 170 190 210 230 250 270 290 310 330 350 370

Spre

ad/Y

ield

Wellington Management Sovereign Risk Index

Australia

Austria BelgiumUK

Canada

Denmark

Finland

France

Germany

Ireland

Italy

Japan

Malaysia

Mexico

Netherlands

Norway

Poland

Portugal

Singapore

Spain

Sweden

Switzerland

US

10-year yields swapped back to USD and Wellington Management Sovereign Risk Index

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Source: Bloomberg | Chart data: 3 January 2017 – 19 January 2018

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Bond market outlookTitle Line 2European Fixed Income still attractive

2001211168/470966_9/470966/470966

1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 11/17 12/17 1/180

1

2

3

4

EUR USD JPY

France 10 year

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Source: Bloomberg | Chart data: 29 January 2016 – 31 January 2018

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Bond market outlookTitle Line 2Less value however if policy is normalising

2001211146/470966_7/470966/470966

1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18-1.0

-0.5

0.0

0.5

1.0

1.5

AUD CAD DBR JGB NZD SEK SGD UKT USD

5-year minus policy

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As of 26 January 2018 | Source: Bloomberg

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Bond market outlookTitle Line 2Forwards markets already pricing some normalisation

EONIA forward curves (%)

Carry and roll

2001206188/470966_11/470966/470966

2 yr 3 yr 4 yr 5 yr 8 yr 9 yr 10 yr 15 yr 20 yr 30 yr-0.5

0.0

0.5

1.0

1.5

2.0 Spot

1-year

2-year

5-year

2 yr 3 yr 4 yr 5 yr 7 yr 10 yr 12 yr 15 yr 20 yr 25 yr 30 yr0

10

20

30

40

Roll Carry

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Bond market outlookTitle Line 2Outlook for 2018

Higher yields but difficult to consistently beat forwards given carry & roll

Flatter curves across the EUR universe; 10‑30 year especially

Front end can reprice further. 5s and 10s rich relative to 30s

Tighter spreads as structure and cycle make further gains

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Areas for discussionTitle Line 2

Geopolitical risks still very important drivers

Melt up v Melt Down

Inflated assets or inflation

The unwinding of balance sheets

The return of Mr Bond?

China cycle risks

What will they look like? Fed, ECB, BOJ staff changes 2018‑2019

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Copyright © 2017 All Rights Reserved2000000298/458668_0/G1422/G1422

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Important noticeTitle Line 2

©2017 Wellington Management. All rights reserved. | As of June 2017

Wellington Management Company llp (WMC) is an independently owned investment adviser registered with the US Securities and Exchange Commission (SEC). WMC is also a commodity trading advisor (CTA) registered with the US Commodity Futures Trading Commission. In certain circumstances, WMC provides commodity trading advice to clients in reliance on exemptions from CTA registration. In the US for ERISA clients, WMC is providing this material solely for sales and marketing purposes and not as an investment advice fiduciary under ERISA or the Internal Revenue Code. WMC has a financial interest in offering its products and services and is not committing to provide impartial investment advice or give advice in a fiduciary capacity in connection with those sales and marketing activities. WMC, along with its affiliates (collectively, Wellington Management), provides investment management and investment advisory services to institutions around the world. Located in Boston, Massachusetts, Wellington Management also has offices in Chicago, Illinois; Radnor, Pennsylvania; San Francisco, California; Beijing; Frankfurt; Hong Kong; London; Luxembourg; Singapore; Sydney; Tokyo; and Zurich. This material is prepared for, and authorized for internal use by, designated institutional and professional investors and their consultants or for such other use as may be authorized by Wellington Management. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients.

In Canada, this material is provided by Wellington Management Canada llc, a US SEC-registered investment adviser also registered in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan in the categories of Portfolio Manager and Exempt Market Dealer. In the UK, this material is provided by Wellington Management International Limited (WMIL), a firm authorized and regulated by the Financial Conduct Authority (FCA). This material is directed only at persons (Relevant Persons) who are classified as eligible counterparties or professional clients under the rules of the FCA. This material must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment service to which this material relates is available only to Relevant Persons and will be engaged in only with Relevant Persons. In Germany, this material is provided by Wellington Management International Limited, Niederlassung Deutschland, the German branch of WMIL, which is authorized and regulated by the FCA and in respect of certain aspects of its activities by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). This material is directed only at persons (Relevant Persons) who are classified as eligible counterparties or professional clients under the German Securities Trading Act. This material does not constitute investment advice, a solicitation to invest in financial instruments or financial analysis within the meaning of Section 34b of the German Securities Trading Act. It does not meet all legal requirements designed to guarantee the independence of financial analyses and is not subject to any prohibition on dealing ahead of the publication of financial analyses. This material does not constitute a prospectus for the purposes of the German Capital Investment Code, the German Securities Sales Prospectus Act or the German Securities Prospectus Act. In Hong Kong, this material is provided to you by Wellington Management Hong Kong Limited (WM Hong Kong), a corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), and Type 9 (asset management) regulated activities, on the basis that you are a Professional Investor as defined in the Securities and Futures Ordinance. By accepting this material you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. In Singapore, this material is provided for your use only by Wellington Management Singapore Pte Ltd (WM Singapore) (Registration Number 201415544E). WM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. By accepting this material you represent that you are a non-retail investor and that you will not copy, distribute or otherwise make this material available to any person. In Australia, Wellington Management Australia Pty Ltd (WM Australia) (ABN19 167 091 090) has authorized the issue of this material for use solely by wholesale clients (as defined in the Corporations Act 2001). By accepting this material, you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Management Company llp is exempt from the requirement to hold an Australian financial services licence (AFSL) under the Corporations Act 2001 in respect of financial services. A registered investment adviser regulated by the SEC, among others, is exempt from the need to hold an AFSL for financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Wellington Management Company llp are regulated by the SEC under the laws and regulatory requirements of the United States, which are different from the laws applying in Australia. In Japan, Wellington Management Japan Pte Ltd (WM Japan) (Registration Number 199504987R) has been registered as a Financial Instruments Firm with registered number: Director General of Kanto Local Finance Bureau (Kin-Sho) Number 428. WM Japan is a member of the Japan Investment Advisers Association (JIAA) and the Investment Trusts Association, Japan (ITA). WMIL, WM Hong Kong, WM Japan, and WM Singapore are also registered as investment advisers with the SEC; however, they will comply with the substantive provisions of the US Investment Advisers Act only with respect to their US clients.

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2018-02-06 BMCG Bond Market Outlook · Bond Market Outlook ECB Bond Market Contact Group ... 2,100...

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