As we enter the fourth quarter, the global economy is running neither too hot nor too cold, which has precipitated a glacial rollback of quantitative easting (QE) by global central banks. The Fed has started tightening after being in easing mode for nearly a decade. While global central banks have slowed their purchases, they are still buying $170 billion in fixed income securities per month. Mario Draghi, the President of the European Central Bank (ECB), has been the most aggressive of the central bankers, driving yields into negative territory across the European Union. In fact, it has pushed the yield of European High Yield bonds below the yield of 10-year US Treasuries. In order to escape negative yields, trillions of assets were effectively sold to the ECB and plowed back into the US credit and equity markets. As of the end of this quarter, a German investor can earn -0.27% per year by buying a 5-year German Bund or purchase a 5-year US Treasury note yielding 1.94%. As we move forward, we will be monitoring the ECB and Fed carefully. Hopefully, global central banks can navigate the unwind and not disrupt the goldilocks scenario.
Read our full Q3 2017 Investor Letter