Fixed Income Review & Outlook Presented by: Matt Toms, CFA, Chief Investment Officer – Fixed Income January 9, 2020 CID-1050582 For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public.
Q4 2019: Fixed Income Market Review US Treasury Yield Curve Fixed Income Sector Total Returns: Q4 2019 4.0 US Agg Total Treasuries Excess 3.0 IG Corp Agency MBS 2.0 CMBS 1.0 HY Corp Global xUS Tsy 0.0 EM $ Sov 0.25 2 5 10 30 EM Local Sov 12/31/2019 9/30/2019 12/31/2018 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Q4 2019 Highlights As of 12/31/19 MRQ PrevQE 1Y Low 1Y High 5Y Low 5Y High US Treasuries yields fell early in the period over a range of global US 10 Yr 1.92 1.67 1.50 2.72 1.45 3.14 concerns (trade, negative yields and recession risks), then pulled Yields GER 10 Yr -0.19 -0.57 -0.70 0.18 -0.70 0.80 back after US data alleviated recession concerns. The US Aggregate was up +0.18% for the quarter and is up 8.72% YTD. JPN 10 Yr -0.01 -0.21 -0.27 0.01 -0.27 0.47 Corporate spread sectors delivered outperformance on the heels of EM Local Sov 5.22 5.21 5.13 6.25 5.13 7.13 a Phase 1 trade agreement between the US and China. Securitized sectors outperformed treasuries, but lagged corporate sectors IG Corp 93 115 93 128 86 197 underscoring their muted sensitivity to global factors. Agency MBS 39 46 32 49 13 49 Emerging markets rebounded, supported by accommodative global Spreads CMBS 72 70 64 79 56 132 central banks and receding concerns about US-China trade talks. The US Dollar declined over the period, as global economies HY Corp 336 373 336 433 316 734 appears to be bottoming and the Fed is on the sidelines for the EM $ Sov 290 337 290 378 264 463 foreseeable future. Past performance is no guarantee of future results. Source: Bloomberg, Bloomberg/Barclays, JP Morgan and Voya. MRQ = Most Recent Quarter End. PrevQE = Previous Quarter End. See appendix for additional index disclosures For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public. 2
Treasury Yields Consolidate in Q4 10-Year US Treasury Yield 3.0 Q1 Q2 Q3 Q4 2.5 2.0 Yield (Percent) 1.5 - Yields initially rose as - Fed cuts and future economic data alleviated cuts fueled the rally fears of a recession - US Treasuries declined 1.0 - Rates fell below 1.5%, - The ebb and flow of further in response to over recession/trade US/China trade talks escalating trade tensions fears and the risk of swayed yields during Q4 - Yield were range bound negative rates and for much of the - Yields declined further 0.5 - Uncertainty declines as period, ending lower as when Fed comments - Yields trended higher Powell announces Fed the Fed pivoted to a more suggested a rate cut was after US data offsets on hold for foreseeable dovish stance on the table growth woes future 0.0 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Source: Bloomberg Barclays and Voya 10-Year as represented by the Bloomberg Barclays 10-year Bellwether Index Data through December 31, 2019 For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public. 3
2019 Key Concerns: Looking Back and Looking Ahead Voya View 2019 Voya View 2020 What we thought then What we think now Slowdown yes… 1 Recession was imminent Risk of US recession a Recession no post-US election risk 2 BBBs: The next crisis BBBs require monitoring Rise in BBBs, a conscious Market too pessimistic corporate decision 3 We don’t need them Negative rates in the US Market acknowledging the We don’t want them was certain downside of negative rates Source: Voya Investment Management December 31, 2019 For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public. 4
1H 2020 Strategic Investment Themes Slower global growth has exacerbated ongoing tensions arising from the increasingly unequal Political 1. distributions of income and wealth , fueled in part by global trade and central bank policies. The Uncertainty resulting rise in populism across the political spectrum creates uncertainty that will stifle near-term confidence and business investment. Fear of limited conventional monetary capacity will extend the current accommodative stance 2. Central in pursuit of elusive inflation goals. Increasing concerns about the attendant costs from prolonged Banks negative policy rates will lead central banks to favor other forms of unconventional policy. The growing belief in the ready willingness to employ additional fiscal capacity, in response to any 3. Fiscal slowing in growth, fortifies confidence and provide downside protection. Fiscal expansion will modestly support global growth . Consumer resilience globally will continue to insulate the services sector from lingering 4. Growth manufacturing weakness and provides a floor to growth . While the lagged benefits of global monetary policy easing supports growth, the upside will be uneven and constrained by ongoing political and business uncertainty. While price inflation remains tame , diminishing spare capacity (of appropriately skilled labor) and 5. Inflation populist forces, will support wage growth. Limited ability to pass through higher costs poses a threat to corporate profit margins. Improving global dynamics will prove supportive to spread product. Given relatively limited upside 6. Markets from current asset valuations, disparate outcomes in growth favor idiosyncratic opportunities over broad market risk taking. Source: Voya Investment Management As of December 31, 2019 For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public. 5
Uncertainty Begets Uncertainty Unequal Distribution of Global Income: Has Led to Voter Dissatisfaction Worldwide Bottom 50% vs Top 1% Voter Approval of Country Heads 25 Top 1% Abe (JP) 49% 20 Percent Trump (US) 43% 15 Trudeau (CN) 41% 10 5 Bottom 50% Merkel (DE) 32% 0 Johnson (UK) 31% 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Macron (FR) 28% Creating Headwinds to Business Confidence While the Path is Known, the Form is Not OECD Business Manufacturing Confidence 2020 Deficit as a % of GDP vs YoY Change 25 1.0 0.0 15 Change from 2019 US Deficit % of GDP -1.0 -0.2 5 Germany -3.0 -0.4 -5 UK -15 -5.0 -0.6 Japan -25 China D-15 A-16 A-16 D-16 A-17 A-17 D-17 A-18 A-18 D-18 A-19 A-19 -7.0 -0.8 US China Japan UK Germany -4.8 -4.8 -3.9 -2.4 +0.6 -0.2 -0.3 -0.3 -0.4 -0.6 Source: 2019 World Income Inequality Report, Bloomberg, OECD and Voya Investment Management Voter approval from https://www.bloomberg.com/opinion/articles/2019-08-23/at-the-g7-trump-s-approval-rating-is-second-to-one, Business confidence as of November 30, 2019 Lower right: Deficit % of GDP for 2019 and 2020 based on consensus estimates from Bloomberg as of 12/30/2019 and are subject to change. For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public. 6
Fed Monetary Policy: Enough to Cushion a ‘Run of the Mill’ Recession Fed Funds Rate: 1995-2019 8 Summary of Fed Rate Cut Cycles Start Start End End # Total Date Rate Date Rate Cuts Decline 6 7/95 6.00 1/96 5.25 2 75 bps 9/98 5.50 5/99 4.75 3 75 bps 1/01 6.50 6/03 1.00 12 550 bps Percent 4 9/07 5.25 12/08 0.25 8 500 bps 7/19 2.50 ? ? 3 75 bps 2 0 95 98 01 04 07 10 13 16 19 Source: Federal Reserve and Voya Investment Management As of December 31, 2019 For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public. 7
The Unintended Consequences of Negative Interest Rates It was supposed to spur consumption It was supposed to support the banks Euro Area Gross Saving Rate Inability to Pass Negative Rates to Depositors Crimps Margins 15 6.0 ECB begins 5.0 negative rates 4.0 14 Lending 3.0 Rate Eonia 2.0 1.0 13 Deposit 0.0 Rate -1.0 03 05 07 09 11 13 15 17 19 12 Cumulative Bank Returns June 30, 2014 – December 31, 2019 11 US Banks European Banks +56.5% -8.4% 10 07 08 09 10 11 12 13 14 15 16 17 18 In US dollars In Euros Source: Eurostat, JP Morgan and Voya Investment Management Euro Area Gross Saving Rate as of September 30, 2019, Lending Rate, Eonia (Euro Overnight Index Average) and Deposit Rates as of October 31, 2019. For cumulative bank returns, US Banks as represented by the total return for the SPDR S&P Bank ETF [Ticker KBE] and European Banks as represented by the total return for the iShares STOXX Europe 600 Banks UCITS ETF (DE) [Ticker SX7PEX GY] For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public. 8
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