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Manning & Napier Commentary: September 2019 Perspective

Bonds Take Center Stage

Fixed income markets stole the show as bond yields sharply and steadily fell all throughout the month. In August, the yield on the US 10-Year Treasury note collapsed 52 basis points (one basis point is 0.01%), sinking from 2.02% to 1.51%.

August's ferocious bond buying marks a culmination in what has been a strong year for much of the bond market. The aforementioned US 10-Year Treasury note began 2019 trading at a yield of 2.69%, over a full percentage point above where it is today. Likewise, the US 30-Year Treasury bond has fallen from 3.02% to 1.97% this year, a historic low.

The bond market strength has driven robust returns for investors (bond prices rise as yields fall). The popular Bloomberg Barclays US Aggregate Bond Index is up 9.1% year-to-date through August. Credit has also performed very well, with investment grade and high yield corporate bonds returning 13.6% and 11.2% year-to-date, respectively.

Our Perspective: While short-term government bond yields are heavily influenced by central banks, long-term bond yields are mostly driven by market and economic forces. This is why investors often look at the US Treasury yield curve as an indicator of economic health.

For more on falling interest rates, see our recent blog post, What Falling Interest Rates Mean to You.

Yield Curve Further Inverts

During August, the falling yield on the 10-Year Treasury note caused it to drop below that of the 2-Year Treasury note, creating a phenomenon known as a yield curve inversion across the two issuances.

A yield curve inversion occurs when shorter maturity bonds return more yield than longer maturity bonds. In a normal environment, investors would expect to earn more for lending out money over longer periods of time.

Our Persepctive: An inverted yield curve is an indicator that economic strain is on the horizon. Early signs of stress challenging markets can already be seen in slower manufacturing activity, dissipating corporate confidence, worsening business profitability, and escalating trade disputes.

Although falling yields boost investor performance in the short term, they create a challenging environment over the long term. Still, there are areas of the bond market where investors can find greater yield, and we encourage those yield-seeking investors to utilize an active approach.

For more on the yield curve, see our recent blog post, Market Falls on Recession Fears.

US-China Trade Turmoil

Just one day after the Federal Reserve chose to lower interest rates, on August 1, President Trump re-escalated the ongoing trade war with China by announcing fresh tariffs on an enormous swath of Chinese imports.

The tariffs are slated to go into effect in pieces between September 1 and December 15. If fully implemented, they will cover almost the entirety of the country's imports from China.

Our Perspective: An end to the US-China trade war is one of the key potential event that could turn markets. Still, we believe that a substantive deal beyond just a trade truce 'in name only' is unlikely anytime soon.

Our View
Economic Cycle Global economic growth has become weak and its future path is increasingly uncertain; the world economy appears to be reverting to a slow growth pace; fresh central bank easing policies may support financial markets, but their overall effectiveness on the real economy should not be expected to be significant
Stock Market Stocks remain somewhat close to all-time highs despite a deteriorating economic environment; equities appear to be ignoring the potential high risk impact of a negative geopolitical or trade event; we expect longer run equity returns to be low
Bond Market Falling interest rates and inflation have led the market to anticipate multiple Fed rate cuts over the next several quarters; credit spreads remain relatively tight
Foreign Exchange Stronger US growth and higher US interest rates vs. the rest of the world have helped the US dollar remain strong; we view the dollar as a critical monitoring point going forward
Important Issues on the Radar Trade Tensions: an total breakdown in trade talks remains a high impact risk to the entire global economy could further damage business and investor sentimentChina Growth: ongoing stimulus efforts are attempting to do enough to support growth despite a softening economyBrexit: ongoing uncertainty regarding the rising potential of a no-deal Brexit is keeping pressure on the UK economy, UK stocks, and the Pound currency

Indicates change

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This article first appeared on GuruFocus.