Writing in the asset manager’s latest Investment Quarterly report, senior macro and investment strategist Herve Lievore noted that the third quarter was marked by central bank moves, such as the US Federal Reserve’s third bout of quantitative easing and the European Central Bank’s new bond-buying scheme.
Yields on so-called safe haven government debt dropped to “irrational levels” at the start of the third quarter as risk aversion rose, Lievore pointed out. The yield on ten-year US treasuries dropped below 1.5% while negative yields were seen in Switzerland, Germany and Denmark.
Investors’ hopes of monetary policy easing, following by actual policy moves, led to a rebound in risky assets later during the third quarter. In equities, all market aside from China – where the Shanghai composite index lost more than 10% over the three months – posted gains.
In corporate bond markets, investment-grade and high-yield bonds also gained over the quarter – although spreads between corporate bonds and government bonds stayed above the low levels seen in 2011.
Giving an outlook for the fourth quarter, Lievore said: “Overall, in terms of asset classes, corporate assets, that is equities and corporate bonds, look attractive relative to core government bonds and cash.”
Factors supporting corporate assets, the strategist said, include the sound financial position of listed businesses and their expected low financing costs. The fact that credit spreads have remained above 2011 is also good news for corporate bonds, he added.
Lievore concluded: “From a valuation standpoint, high-quality government bonds offer yields that do not even cover current inflation. In our opinion, unless risk appetite plummets, these levels do not offer much value in the medium term.”
