Investments were placed across all maturities on the yield curve with a slight preference for short and intermediate term funds. Corporate bond funds saw deposits of $502 million, reversing the outflow trend of the prior six months. The push to reduce fixed income risk over the course of the month took the heaviest toll on high yield ETFs, which saw outflows of $928 million. Spread levels are now at their highest in three years at nearly 630 basis points. Meanwhile, expected defaults remain below historical averages.
Looking Forward
While the wild ride of the third quarter is in the rearview mirror, we may be stuck with this notion of policy purgatory and its effect on the markets for a bit longer.
Softer-than-expected payroll growth in September may keep the Fed cautious, while the Eurozone’s inflation rate dipped below zero, fueling speculation of more quantitative easing from the European Central Bank. In Japan, “Abenomics” still has a tough road ahead as the nation struggles with low growth, and we may see China enact further stimulus as manufacturing data still points toward economic contraction.
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Definitions
A fund that employs a currency hedge strategy, which is the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates.Yield Curve
The yield curve, also known as the “term structure of interest rates,” is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest.
Fixed Income Risk
Risk attributed to investing in Fixed Income securities.
Spreads
Credit spreads are the difference in yield between any type of bond, and a US treasury of the same maturity. Corporate bonds, which carry a risk of default, yield more than US Treasury Bonds, which carry no risk of default.
Abenomics
Abenomics refers to the economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe to his second term as prime minister of Japan. Abenomics is based upon “three arrows” of fiscal stimulus, monetary easing and structural reforms.
1Bloomberg, as of 9/30/2015
2Bank of America/Merrill Lynch Global Fund Manager Survey, as of 9/15/2015