The U.S. fixed income markets continue where they left off in 2019 as the “lower for longer” yield environment intensifies. Despite record low yields, investor demand for fixed income has not waned. Through the first eight weeks of 2020, investors have poured an additional $71 billion into investment grade fixed income mutual funds and ETFs and $17.8 billion into municipal bond funds and ETFs. Lower rated securities have not fared as well, with high yield seeing $2.0 billion added to funds and ETFs and the leveraged loan market experiencing modest outflows year-to-date.
Corporate borrowers took advantage of the strong demand from investors by issuing $223 billion of debt through the first eight weeks of the year, up 33% from the same period as last year. Despite the increased supply in the market, it has easily been absorbed by investors. In fact, demand for fixed income securities has been so strong that most new issue bonds in both the investment grade credit and municipal bond markets have been multiple-times oversubscribed, allowing issuers to lower yields.
Through February 28, 2020, high quality fixed income securities have been one of the few positives across the markets. The Bloomberg Barclays Aggregate Index has returned 3.76% year-to-date, led by U.S. Treasuries returning 5.16%. Despite 29 basis points of spread widening, investment grade credit has returned 3.71% year-to-date and municipal bonds, as represented by Bloomberg Barclays 1-10 Year Index, have returned 2.02%.
Increased concerns over the spread of the COVID-19 coronavirus and its potential impact on the global economy has pushed Treasury yields to record lows in the 10 to 30-year maturity ranges. Prior to the coronavirus outbreak, the Federal Open Market Committee (FOMC) had been expecting to leave interest rates unchanged for most of the year. Investors, on the other hand, are now pricing in three rate cuts, or 75 basis points, by the end of 2020. We believe the FOMC will act as needed to try to dampen the impact the virus could have on the U.S. economy. We could see the FOMC act as soon as the March 18th meeting, especially if the equity markets continue to deteriorate and the impact of the virus on the global economy appears to be greater than expected. We are in a “low for longer” yield environment, yet despite the record low yields, we believe demand for fixed income investments will remain strong.