Why So Much Negativity?

Fixed income markets in much of the developed world are sailing in uncharted waters. Outside the United States, a large portion of the developed fixed income market is trading at negative interest rates (see Exhibit). In the United States, the 10-year US Treasury is trading at an extremely low yield—one that has historically been consistent with conditions of severe US economic distress.

Investors must understand the factors contributing to this extreme interest rate environment in order to safely navigate these uncharted waters—that is, to preserve capital and maintain enough liquidity to meet cash obligations. Does the low interest rate environment reflect underlying weakness in US economic fundamentals? If not, why are rates so low? And regardless of the answer to those two questions, how should investors position their portfolios in order to maintain the margin of safety expected from a US fixed income allocation?

Exhibit: Negative Yielding Debt Went from $0 in 2013 to More Than $15 Trillion in 2019

As of 30 September 2019
Source: Bloomberg

A Sea of Calm

Economically, the United States remains a sea of calm. Unemployment is at historically low levels. The headline U-3 unemployment rate is at a multi-decade low of 3.7%. Corporate leverage has grown, but so have corporate earnings. As a result, default rates are running below their historic long-term average. Contrary to the pessimism implied by US rates, default forecasts from the likes of JPMorgan and Moody’s remain low and lending conditions are easy, according to the Federal Reserve’s index of financial conditions. Nominal GDP growth and inflation remain positive, and we expect trends in both measures to remain steady.

Smooth sailing or all hands on deck? Read the full Lazard Insights paper.

The preceding is an excerpt of Why So Much Negativity?

Important Information

Originally published on 18 November 2019.

This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management. Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a robust exchange of ideas throughout the firm.

This document reflects the views of Lazard Asset Management LLC or its affiliates ("Lazard”) based upon information believed to be reliable as of the publication date. There is no guarantee that any forecast or opinion will be realized. This document is provided by Lazard Asset Management LLC or its affiliates ("Lazard”) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service, or investment product. Investments in securities, derivatives, and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results. The views expressed herein are subject to change, and may differ from the views of other Lazard investment professionals.

This document is only intended for persons resident in jurisdictions where its distribution or availability is consistent with local laws or regulations. Please visit www.lazardassetmanagement.com/global-disclosure for the specific Lazard entities that have issued this document and the scope of their authorized activities.

© Lazard Asset Management

Read more commentaries by Lazard Asset Management