The debate whether Central Banks should refrain from tightening their policies was a very important preposition, which bond investors monitored very cautiously. Indeed, 2018 was the first year in decades where bond investors started to feel the first pinch, in terms of performance, of tighter monetary policies, as the Federal Reserve continue to hike interest rates, in addition to geopolitical tensions. The latter emerged as the main consequence for a revision in global growth figures, which conditioned Central Banks decisions.

Indeed, on Wednesday the Fed, as expected, held interest rates unchanged. That decision was priced-in. However, what was more to be digested was the forecast of no rate hikes in 2019. This was a notable U-turn following December’s rate hike which continued to rattle markets.

Internally, in a market review meeting, I recall very well discussing whether the Fed was going nuts and that it had been insensitive to the ongoing market turmoil. Indeed, we all agreed that it was not the right decision. Wednesday’s news witnessed the fact that the Fed was wrong on December’s hike.

That said, looking at the positive side of the story, that rate hike created a bunch of opportunities primarily in less risky bonds, better known as investment grade bonds, in the US, while European HY also traded wider as investors continued to fear the lower global growth figures, and eventually a recession. The said moves offered value, with low risk. As I have opined in previous writings in early January, there was huge value in names with the likes of Apple, an AA+ rated name, which to-date is up more than 8 per cent in the medium-term maturity bucket on a USD-denominated bond.

Furthermore, those investors who managed to envisage the abrupt break in rate hikes might have also viewed sovereign bonds as attractive. Indeed, in early January we dipped into the European sovereign debt market, as given the wave of downward growth revisions, we believed that Central Banks would tweak their stances. To date those positions also emerged as important contributors towards performance.

Moving forward, we believe that in the short-to-medium term Central Banks will hold their horses in terms of monetary tightening and such decisions augur well for credit markets. We are of the view that this monetary support will continue to be supportive for the fixed income asset class in different magnitudes within the class.

For instance, we view that Wednesday’s decision was a negative for a stronger dollar, but positive for emerging markets whereby we still see value following a torrid 2018. Thus, the pause by Central Banks should offer diligent investors a niche value of returns surely in the short-to-medium term.

Disclaimer:

This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.