FTSE Russell’s Marshall: Yield curve inversion warnings ‘misplaced’

Tom Eckett

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Robin Marshall, director, fixed income research at FTSE Russell, has said concerns around the inverted US Treasury yield curve are overdone despite the last five 2-10 year inversions signalling to a recession.

Speaking to ETF Stream, Marshall (pictured) said investors faced an entirely different market environment compared to previous cycles with central banks entering the market to buy bonds which, in turn, has led to secular stagnation.

In this environment, Marshall argued the predictions of a recession in the near future were “overdone” despite the inversion due to the loose financial conditions seen globally.

On 14 August, US 2-years and 10-year Treasury yield curve inverted for the first time since 2007, a typical sign of a recession.

However, FTSE Russell’s fixed income research director explained the environment is very different to 2007 when US GDP growth was at 6% and financial conditions were tightening.

Marshall’s comments echo the views of former Federal Reserve Chairman Janet Yellen, who, earlier this month, warned the inverted yield curve “may be a less good signal” on this occasion.

“The reason for that is there a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields,” Yellen told Fox News.

Instead, a key theme this year in the fixed income market has been the loosening of monetary policy from central banks across the globe.

After signalling four rate increases in 2019 at the end of last year, the Fed ended up cutting rates in its July Federal Open Market Committee (FOMC) meeting while the European Central Bank (ECB) has signalled plans to cut rates and take additional measures to stimulate the lacklustre eurozone economy.

Marshall, who is speaking at ETF Stream’s Big Call: Fixed Income event in September, warned this period of low growth could lead to the “Japanification” of Western economies, where low interest rates prop up ailing companies. This “creates a zombification effect” in the economy.

“Secular stagnation is occurring across the globe,” he continued. “Zombie banks and companies, that are not profitable, cause the economy to create weak productivity and growth.”

In this environment of low rates, Marshall said central banks face an “enormous” challenge of finding a way of reflating these developed economies.

“ECB President Mario Draghi has said there are ample instruments available in the toolkit but I am sceptical about how much they can do.”

As a result, this secular stagnation has driven yields to negative in many developed economies and caused investors to look further afield.

One area which has done particularly well, he noted, is emerging market debt barring the idiosyncratic blow-ups in Argentina and Turkey.

Emerging market debt has come out well in this environment. There is less evidence of contagion risk with emerging markets compared to previous cycles.”

Overall, fixed income has been the most popular asset class for investors this year. Fixed income ETFs saw a record $107bn inflows globally in H1, the first time flows have crossed the $100bn mark in the asset class, according to data from Morningstar.

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