Global Bond Index Insights Reveal Global Trends
In the financial world, two significant issues are currently at the forefront: the approaching US debt ceiling and the recent performance of the global bond market, particularly the FTSE World Government Bond Index (WGBI).
The US government is edging closer to its debt ceiling, the maximum amount it can legally borrow. If not addressed, this could potentially lead to another government shut-down, a situation that has been avoided since 2013.
The WGBI, a global standard for the sovereign debt markets, has seen some of its weakest performance returns in the past three years. This is largely due to a transition to higher yields and lower bond prices as interest rates rose to combat inflation. The index, launched in 1984 with overall "triple A" credit ratings for its bonds, now has only 11% of its issuance rated as triple A, while 57% is double A. The US, notably, has no triple A-rated bonds, with the best rating being a "double A-plus."
The US economy, described as "a bit of a curate's egg" by Robin Marshall, shows signs of faster growth and good productivity, but also increasing debt-to-GDP ratios. Meanwhile, countries like Greece, Portugal, and Spain were downgraded by credit rating agencies following the global financial crisis, with Greece, Italy, and Portugal showing the highest increases in debt-to-GDP ratios.
Bond investors are more concerned about debt-to-GDP ratios and debt-servicing costs. Concern about debt-to-GDP ratios has increased in recent years, with investors worried about whether countries are going to be able to grow enough to pay their coupons.
In the US, shutdowns are seen as a way to save money and avoid the need for further borrowing. However, these temporary closures can have far-reaching impacts on the economy.
Interestingly, the return on bonds with a maturity of 1-3 years is 6.1%, while the return on 10-year bonds is 5.8%. However, for 20-year plus maturity bonds, there is a 3.3% loss.
In the realm of defined benefit (DB) pension schemes, higher yields have helped move these schemes into a funding surplus after 20 years of deficits. Higher yields mean that the present valuation of liabilities falls for DB schemes.
The FTSE Debt Capacity World Government Bond Index, a variant of the original WGBI, has a lower weighting for the US compared to the main WGBI. This shift in focus could have implications for the future performance of these indices.
Government bonds are attractive to income investors due to yields in the 4-5% area. However, the valuation of fixed income assets has fallen, and this could impact the returns for these investors.
In an attempt to diversify portfolios and improve performance, some investors are turning to gold and digital assets. These additions could provide a buffer against market volatility and improve overall returns over a 60/40 portfolio.
As the US approaches its debt ceiling and the global bond market continues to evolve, it's clear that these issues will continue to be closely watched by investors and economists alike.
