BNY Mellon Investment Boutique Sees Asset Returns Likely to Lag Historical Averages over Next 5 Years
NEW YORK and LONDON, October 28, 2013 — Emerging market debt and U.S. corporate bonds are expected to be among the better performing fixed income segments through 2018, although asset returns are likely to be below historical averages over the next five years, according to the five-year outlook published by Standish Mellon Asset Management Company LLC, the Boston-based fixed income specialist for BNY Mellon.
Rising rates are expected to be the main drag on fixed income returns, according to the report, as Standish expects the U.S. Federal Reserve to begin raising short-term interest rates by the middle of 2015. Other factors expected to lower asset returns over the period are diminishing quantitative easing, increasing regulation and global polarization, which Standish projects are likely to increase market volatility, lower liquidity and heighten geopolitical risk.
The report, Prospective Returns: 2013 to 2018, was written by Thomas Higgins, chief economist and global macro strategist for Standish, and Edward Ladd, chairman emeritus of Standish.
"Our analysis suggests that the federal funds rate will increase from between zero percent and 0.25 percent today to three percent by the end of 2018, with the two-year U.S. Treasury mirroring this rise," said Higgins. "This would lead to relatively unattractive returns for Treasuries, when compared with EM debt, corporate bonds, and other fixed income segments."
Higgins added that a five-year outlook could help investors with a longer time frame capture distortions in the market created by other investors with much shorter time frames.
Among the other projections by Standish are:
- Normalization of monetary policy to result in higher market volatility -- Central banks in developed markets are more likely to use conventional tools such as short-term interest rates to achieve policy goals, rather than use unconventional tools such as asset purchases under quantitative easing.
- Government fiscal woes to increase credit premiums in developed markets -- While spending has been limited and tax revenues have increased in the short term, more needs to be done to bring down debt levels in relation to gross domestic product (GDP) in developed economies.
- Privatization of housing finance to raise borrowing costs for home buyers -- Implementation of mortgage finance reform could take five to 10 years, but nearly all reform proposals would limit government's future role.
- Tighter financial regulations to lower liquidity and increase transaction costs – With a goal of reducing systemic risk, the regulatory environment has become more restrictive in the aftermath of the financial crisis.
- Shale gas/oil revolution to lower energy prices -- The lowering of costs to extract oil and gas from previously hard-to-reach areas is expected to add to U.S. growth by reducing foreign imports of oil and lowering the cost of energy.
- Higher structural unemployment to increase income inequality and risk of social unrest -- This could lead to rising social unrest in developed markets, as well as more frequent strikes.
- Weaker growth in China to weigh on global growth -- Slower Chinese economic growth could have negative consequences for countries that have become dependent on Chinese demand.
- Stubbornly high unemployment in peripheral countries of Europe to raise risk of social unrest and backtracking on debt targets – Bond holders could take haircuts and fiscal transfers might occur from wealthier core economies to the most heavily indebted.
- Multi-polar world with no global superpower to slow globalization process and increase geopolitical risk -- Slower growth in world trade could hurt those who rely most on external demand to drive their economies.
- Slowing FX reserve accumulation to lessen demand for Treasuries -- Emerging market countries are developing their own local debt markets, which could reduce demand for Treasuries and result in higher Treasury yields.
Standish Mellon Asset Management Company LLC, with approximately $163 billion of assets under management, provides investment management services across a broad spectrum of fixed income asset classes. These include corporate credit, emerging markets debt (dollar-denominated and local currency), core / core plus, tax–sensitive, short duration, stable value and opportunistic (U.S. and global) strategies. Standish also offers full service capabilities in insurance client strategies and liability driven investing. The firm includes assets managed by Standish personnel acting as dual officers of The Dreyfus Corporation and The Bank of New York Mellon and Alcentra NY, LLC personnel acting as dual officers of Standish.
BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, with $1.5 trillion in assets under management. It encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellon.com.
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of Sept. 30, 2013, BNY Mellon had $27.4 trillion in assets under custody and/or administration, and $1.5 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com, or follow us on Twitter @BNYMellon.
Sept. 30, 2013. This press release is qualified for issuance in the UK, Europe and US and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorized. Any views and opinions contained in this document are those of the author as at the date of issue; are subject to change and should not be taken as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This press release is issued by BNY Mellon Investment Management (US) and BNY Mellon Asset Management International Limited (ex-US) to members of the financial press and media and the information contained herein should not be construed as investment advice. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. Registered office of BNY Mellon Asset Management International Limited: BNY Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorized and regulated by the Financial Conduct Authority. A BNY Mellon Company.