It has been quite the year for the bond markets as they have more or less mirrored the volatile global economy through the fluctuations caused by the COVID-19 pandemic. As the economy continues to slowly recover from the March lows, investors can expect a slightly steepening yield curve but with tempered expectations for the long-term as Central Banks keep interest rates low in economies around the world. Specifically in the United States, the Federal Reserve has been aggressive in aiding the ailing economy and has announced an inflation target of average, rather than providing a specific price target. It can be expected that for now, inflation should stay lower in the near future as the economy continues to struggle through the global pandemic.
Emerging market bond markets
The EM bond markets have been in high demand as of late with a struggling U.S. dollar and an economic rebound in many parts of the world. Less restrictive monetary policies in other areas of the world should help in keeping these current prices and could help investors receive higher yields in the near future. The inherent uncertainty that accompanies EM bond markets will continue to test the risk adversity of investors, but currently, it is nice to see that the relative yield levels for these markets are back above the pre-COVID levels signalling that these EM bond markets have mostly recovered from their March lows.
Corporate bonds are another part of the bond market that has been volatile over the past few quarters and maybe an area where investors will want to look elsewhere if they are seeking higher yields in the short-term. Many corporations have seen a severe deterioration in profits during the pandemic and to counteract this, corporate bond issuance has skyrocketed. The risks for investors over the long-term may be affected by how companies are able to cope with the fallout from the COVID-19 pandemic. Of course, in the short-term fiscal and monetary policies should be able to soften the blows and help to prop up the corporate bond market, but long-term investors may wish to look elsewhere.
Municipal bond markets and funds have been popular as well, exhibiting a nice in-flow over the past few months as investors seek stability during these uncertain times. Higher demand for these bond funds has created less variance in the yield spread which means that the market has exhibited less volatility. Another factor for municipal bonds that are not as evident in other forms of bonds is the increase in natural disasters that have been affecting countries all over the world. The frequency has been steadily rising over the past few decades and repeated damage to infrastructure in these municipalities can devastate a city both physically and financially. While historically natural disasters have not had too harsh of an effect on municipal bonds, if the frequency keeps increasing, there is the possibility that this could one day have an effect on the yield that investors see.
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