Investment Review
Fixed Income
Fixed income markets delivered strong returns in 2019 as central banks around the world reversed plans to tighten monetary policy, bond yields fell and expectations for global growth declined.
The marked slowdown in the global economy was mainly driven by cyclical weakening in the manufacturing and trade sectors, as well as broader uncertainties related to global trade relations. Inflation moderated and remained subdued across most developed and many emerging economies. Despite these factors, household consumption and labour markets held up well in the US and Europe, supporting domestic services activities.
Weaker growth and below-target inflation resulted in several major central banks such as the US Federal Reserve (‘the Fed’) and the European Central Bank cutting interest rates to prevent a deeper slowdown. Aggregate central bank balance sheets grew again in the second half of the year, resulting in lower bond yields for developed market sovereigns over the course of 2019. 10yr US yields fell by approximately 75bp, 10yr German bond yields saw new lows of -0.70% and yield spreads in Europe compressed. The US Dollar (‘USD’) weakened in January as the Fed moved away from a hiking bias. However, the relative strength of US growth and a higher interest rate differential meant this depreciation was soon reversed and the USD strengthened over the remainder of the year.
Emerging market local currency government bonds rallied in 2019 due to weaknesses in both growth figures and inflation, as well as the lower interest rate environment for developed markets.
Emerging market performance was also driven by idiosyncratic factors, including global trade exposures, domestic growth and inflation dynamics as well social and political events. High quality hard currency assets delivered the strongest performance.
In corporate credit, the weaker end of the credit spectrum saw cautiousness grow during the year, while low volatility, or low beta, credits enjoyed a rare rally with spreads driven tighter by the promise of renewed monetary easing.
The Fixed Income & Treasury Department introduced its Single Pool Framework at the start of 2019, which combined previously separate portfolios into one department-wide pool. This is designed to reduce complexity and increase efficiency as the Department transitions to managing more of its assets under a single active risk budget.
In support of the implementation of the single pool, the Department enhanced a number of back and middle office functions during the year. The Department will continue to explore ways to systemise and incorporate data into the investment process in 2020, as it deploys more of its active risk budget through the Single Pool Framework.