Income solutions – Are there any opportunities in this low interest rate environment?

Guy Ertz

Interest rates and bond yields are very low and are expected to remain that way for quite some time. Indeed, we now assume that the Fed will decide two rate cuts this year and another one in mid-2020. The ECB stands ready to act if the situation does not improve. We assume that the ECB will remain on hold for this year, unless the situation deteriorates. Prudent central banks, slowing growth and the drop in inflation expectations pushed bond yields lower. We revised our US bond yield targets to 1.75% from 2% for the 2-year yield and to 2.25% from 2.50% for the 10-year yield. In such an environment, investors have a key challenge to seek for alternatives in income generating assets. We offer a pool of ideas. 

Structured products based on the assumption of the limited downside for oil prices

We keep a positive outlook despite the recent weakness. We have a price range of $65-75 for the Brent. Indeed, OPEC, Russia and associated countries will most likely agree early in July to prolong their production restrictions. Short-term, there will be a limited supply due to the Iranian sanctions and disruptions in Russia, Venezuela, Libya and Nigeria. The medium-term outlook is bullish due to the lack of investments in traditional oil fields. 

Emerging Market Bonds in local currency

Lower interest rates and weaker US growth point to a fall in the USD, going forward, which is positive for EM bonds. We thus see room for further compression in EM local currency rates, despite the uncertain global trade backdrop. While trade tensions via the strengthening of the US dollar poses a risk, global liquidity and US financial conditions remain at supportive levels for local currency rates. Low inflation in EM coupled with expected lower interest rate in the US, should push EM central banks to cut rates with limited risk to see their currencies depreciate. We expect several countries to cut rates (Brazil, Mexico, Indonesia, South Africa and Turkey) and foresee limited rate hikes in Colombia and Chile. Also, the asset class offers a 5.7% average yield, which is attractive compared to developed markets yields. We stay positive on the asset class.