The sustainable investor for a changing world

Hong Kong skyline
Front of mind | Article - 4 Min

Fixed income outlook: the hunt for inflation

The most significant monetary policy developments in 2020 are unlikely to be policy rate changes; instead, many central bankers will be looking into the tools they have – or need to craft – to manage debt-loaded economies, muted growth and elusive inflation.

  • Japanification worries central bankers
  • Inflation targets still specks on the horizon
  • US yields look to be range-bound
  • Among eurozone yields, look to the periphery

Both the US Federal Reserve and the ECB are evaluating how to conduct monetary policy in a world of persistently low – and below-target – inflation where economies suffer from, or risk becoming the object of, Japanification. Such a vicious economic circle is marked by high debt, low growth, low interest rates, and low inflation.

Following in Japan’s – low growth, low inflation – footsteps?

At first blush, the situation in Japan – the origin of the label – does seem dire: average real GDP growth stands at just 0.9% a year over the last two decades, the population is in decline, and the ratio of workers to retirees is deteriorating. Japanese government bonds have returned just 1.8% over the last 20 years compared to 5.2% for the Bloomberg Barclays Global Aggregate ex-Japan bond index. Equities have lagged by a similar amount.

By other measures, things look brighter. While debt is high, low interest rates mean that the debt burden is low and with the bulk of debt held domestically, it is unlikely that a loss of investor confidence would hit the yen. At 2.2%, the unemployment rate is below that even in the US.

Japan’s GDP growth is inevitably lower than in countries with rising populations, but relative to the number of people in the country, Japan’s performance is strikingly good. GDP per capita growth has until just recently outpaced that of the US and is easily faster that of the eurozone (see Exhibit 1).

Exhibit 1: Japan is ahead in terms of GDP per capita

Real GDP, in local currency terms; 2009 = 100

macroeconomic GDP FI 1

Data as at 3 January 2020. Source: Haver, BNP Paribas Asset Management

Even if Japan’s situation is not as bad as assumed, central bankers would still rather have higher inflation and higher interest rates to have greater scope for cutting rates to offset an economic slowdown.

How effective can central bankers be in the hunt for inflation?

The Bank of Japan set a 2% inflation target in 2013 and then, alongside negative interest rates and yield-curve control in 2016, announced it intended to overshoot it consistently. Effective?

On one hand, the BoJ has had some success. Between the end of 2012 and now, core inflation has risen by nearly 90bp. US inflation is 40bp higher, while the eurozone rate is 35bp lower. For Japan and the US, core inflation is now above the average of the 10 years before the global financial crisis (see Exhibit 2).

Exhibit 2: Core inflation rates

All items less food and energy; dashed line is 10-year, pre-GFC average

macroeconomic inflation FI 2

Data as at 3 January 2020. Source: Haver, BNP Paribas Asset Management

Markets are unconvinced, however, that the central banks will ultimately succeed in meeting their inflation targets. Even as core inflation in Japan and the US has slowly recovered, inflation expectations have continued to fall. They are currently only slightly above their all-time lows.

Given rising technological disinflationary headwinds (e-commerce, sharing apps, etc.), the task ahead for central banks is large. Success by no means guaranteed.

US yields: at the mercy of external events?

With steady economic growth, stable policy rates, and subdued inflation expectations, we expect 10-year US Treasury yields to range between 1.6% and 2.0% this year. Even with the unemployment rate at its lowest since 1969, wage inflation is decelerating.

The Fed is unlikely to change interest rates until after the US presidential election as GDP growth slows to trend, even though further cuts are arguably needed given that inflation is still below target.

While there could be further fiscal stimulus if not only president Trump wins re-election, but the Republicans to retake control of the House of Representatives, we believe the more likely outcome is a divided Congress, limiting the scope for significant spending, borrowing or taxation shifts.

As a result, Treasury yields are likely to be most sensitive to geopolitical events, from trade tensions with China to events in the Middle East.

Eurozone yields: the promise of the ‘periphery’

We expect equally little change in monetary policy. Much attention will likely be paid to Sweden, which has led the way out of negative interest rates. Growth and inflation trends will tell policymakers whether the benefits of non-negative rates would outweigh what could appear as a tightening in monetary policy. However, the ECB’s pledge not to raise rates until after QE has ended ties its hands.

Consequently, the yield on much of the core government debt is likely to remain negative.

Investing in ‘peripheral’ market bonds would be one of the few options to earn (barely) positive total returns in 2020. The most obvious investment risk is Italy. Elections could return the Lega party to power, sparking a renewed widening in Italian government bond spreads.

video Dominik DeAlto Investment Forum 2019

Also watch Low interest rates in 2020 and beyond, a video with Dominik DeAlto, CIO Global Fixed Income. He comments on investors still seeking higher-yielding asset classes and singles out corporate bonds, structured securities and other spread products as appealing opportunities. He favours a long risk, long duration position to have exposure to falling interest rates.

Watch the video

This is an extract from our fixed income outlook for the first quarter of 2020

This article appeared in The Intelligence Report

TIR cover small

To discover our funds and select the ones that meet your requirements, click here > or visit your local country website

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Related insights

Fixed income outlook – From despair to hope
Fixed income outlook 2Q21 – The whites of their eyes

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.


BNP Paribas Asset Management seeks to integrate environmental, social and governance (“ESG”) factors into all of our portfolios as a means to mitigate certain short, medium and long-term financial risks, identify better long-term investments, and encourage more responsible corporate behavior. We will never subordinate our client’s interests to unrelated objectives. Certain issuers and industries are excluded from our actively managed portfolios based upon our view of their ESG performance and risk profile. As a result, we may pass up certain opportunities when these excluded issuers or industries are in favor. Due to significant gaps in disclosure regimes around the world, we may need to rely upon voluntary disclosures by issuers, which are often not audited. We therefore may not have consistent access to complete, accurate or comparable information about the ESG performance of our holdings. Please consult the applicable offering document for more information about the specific ESG strategy employed by each investment strategy since a given strategy may not have specific ESG guidelines, and investments are not limited to securities that are ESG compatible.

BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2024 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP PARIBAS ASSET MANAGEMENT is the global brand name of the BNP Paribas group’s asset management services. © 2024 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

To access insights from our teams worldwide visit:
Explore VIEWPOINT today