Veteran fixed-income investor Mark Vaselkiv of T. Rowe Price discusses the versatility and appeal of fixed income, even in a low- to negative-yield environment. Vaselkiv, a 30-year investment industry veteran, is manager of T. Rowe Price’s High Yield Fund and institutional high-yield strategies, and co-manager of the T. Rowe Price Global High Income Bond Fund.
P&I: What are the macro factors that are buffeting fixed-income investments and investors today?
Mark Vaselkiv: Since the financial crisis, growth has taken a dramatic leg down. We see a couple of reasons for that. One is that there is a demographic trend at work where, in Europe, the U.S. and particularly Japan, populations are getting older, and as populations age, consumption declines. Productivity has also plummeted, and that’s slowing growth. We also think that the significant amount of inequality in the global economy is a contributor.
Central banks have been trying to stimulate growth to make sure that we get out of this rut. When you think about central bank policy today, the G-10 countries [Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the U.K. and the U.S.] have issued about $34 trillion worth of sovereign debt. But about 35% of that carries a negative yield today, more than 70% is below 1%, and more than 90% is under 2%. It’s so different from anything we have experienced in our lives in the fixed-income world. And those sovereign rates really set yields and valuations for all kinds of fixed-income securities.
The question is, can the Federal Reserve or the ECB (European Central Bank) or the Bank of Japan really do enough to push the needle higher on growth? We would argue that’s not going to be the case. And that leads to the question of the efficacy of central bank policy, which is raising a whole host of issues, such as whether fiscal easing is the next step for some countries.
P&I: Can or should investors tune out those questions about monetary policy? What should they be focused on?
Mark Vaselkiv: Risk-free bonds can serve as insurance policies in the event of a very serious geopolitical or economic problem in the world. Having some risk-free safe instruments, such as U.S. Treasuries or German bunds, provides a level of downside protection in a world where those types of anomalies occur with increasing frequency.
It’s clear that investors are willing to hold onto those types of securities and even this year, notwithstanding the fact that rates have been very low, they’ve still delivered very positive returns. So amazingly, the German bund market has delivered more than 5% year-to-date, and even the five-year Swiss bond has generated positive total returns. So holding instruments able to perform in times of stress remains very important.
And I would also say, as a little bit of a corollary to that point, that central bank policy really has acted like a fire extinguisher during these periods of major volatility. I think the classic example of that would be this summer, when the Brexit vote took the whole world by surprise. Right after that, for the first two or three days, global financial markets lost trillions of dollars and there was a major anxiety attack going on pretty much everywhere. But the central banks stepped in quickly and their moves really put the fire out. The markets calmed down dramatically and we were back off to the races because of that expectation that the fire truck will always show up when something goes wrong.
And so yes, you can talk about negative yields, but if you think about those securities as insurance policies, there is a cost to owning any insurance policy.
