Geopolitical Worries
Challenges might be a good thing for fixed-income investors. Bonds often display a tendency to move in opposite directions from equities, so while a major geopolitical shock like the United States’ rocket attack that killed Iranian general Qasem Soleimani on January 3 sent equity markets tumbling, it had an inverse effect on the Bloomberg Barclays U.S. Aggregate Bond Index, sending the largest index of investment-grade bonds higher.
Such events are difficult, if not impossible, to predict, but there seems to be some consensus about a GDP growth rate near 2% for 2020, just barely beating inflation. Elswick says that muted economic growth probably means 2% to 2.5% returns from fixed-income investing, but more positive economic news could cause the bond universe to go negative.
“All you have to get is a little bit better economic data coming from outside the U.S., and a little bit of improvement in investor sentiment, and that would make us too optimistic,” says Elswick. “Instead of the 10-year Treasury rising 30 basis points, it could rise another 30 or 40 on top of that,” causing a broad swath of the bond universe to lose value unexpectedly.
Continued Uncertainty On Trade
Though the U.S. and China signed “phase one” of a bilateral trade agreement in mid-January, and Congress ratified a new North American trade pact, there’s still enough uncertainty about tariffs and trade to give pause to economic decision making, Khanna says.
“If you are in the boardroom at a large corporation contemplating making a capital investment, opening up a factory or a new line of business, you might be reluctant to do that in the face of not knowing what the tariff situation is moving forward, what our policies are likely to be and who is going to be in office,” he says. “All of that uncertainty causes the investment portion of the economy to be a little less predictable.”
Elswick says that any further positive momentum on trade agreements could force yields upward and buoy riskier assets like equities, which would be a negative for rate-focused bond investors in Treasurys and other investment-grade sectors of fixed income.
Threading The Needle On Monetary Policy
Adams believes that central banks will remain accommodative throughout 2020.
“We think that the Fed has made it clear that the bar to hike interest rates is very high,” says Adams. “We would need to see a move above the 2% rate target. The bar is actually pretty high both to hike and to cut, but it’s higher to actually hike. We think you need a significant uptick in inflation expectations for the Fed to move, and we don’t see a case for that.”
Khanna and Elswick also expect the Fed to be on hold throughout 2020, barring any surprise policy moves.
That may be best for investors, says Randy Swan, founder and lead portfolio manager at Swan Global Investments, where he runs $4 billion of hedged equity strategies.