Expected Rise in U.S. Treasuries Poses Challenge for Investors
Emerging markets bonds and high yield fixed income could deliver positive returns under most scenarios envisioned for 2014, according to the February/March Bond Market Observations from Standish Mellon Asset Management Company LLC, the Boston-based fixed income specialist for BNY Mellon.
The attractiveness of some emerging markets bonds is enhanced by currencies that have declined to levels below fair value in some countries, Standish said. The Standish report also noted that selected peripheral European sovereign debt also could provide opportunities in 2014 as economic fundamentals have strengthened and structural improvements have been made.
"This year we have to contend with concerns about growth, significant monetary policy changes, and a number of idiosyncratic and political uncertainties," said David Leduc, chief investment officer for Standish and author of the report. "Nonetheless, our base case is for stronger growth in developed economies and stabilization in developing markets later this year."
Standish said it expects government bond yields will gradually move higher in 2014 as the global growth outlook improves and inflation begins to stabilize. In the U.S., Standish said it expects yields for Treasury bonds to rise to a range of 2.73 percent to 3.61 percent, depending on the strength of economic growth and the improvement in the labor market, resulting in negative returns for 2014. Under its base case scenario, Standish expects the yields to end the year at 3.50 percent.
"The challenge for bond investors will be to find positive returns against a backdrop of rising government bond yields in the U.S. and other developed bond markets," Leduc said. "However, we see several areas where fixed income investors have the potential to achieve positive returns."