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Fixed Income Quarterly Outlook – Q3 2020

Global Fixed Income

BNP Paribas Asset Management

Second waves and double dips

Key Points

  • Uncertainty about the evolution of the pandemic remains high, with hotspots reappearing and infections still rising to various degrees around the world.
  • The better-than-expected rebound in retail sales both in the US and Europe shows the potential for economies to rebound quickly from lockdowns. But a second wave of infections could yet lead to a double dip in growth.
  • We expect fiscal support to continue to the degree necessary to allow workers and businesses to survive the collapse in growth caused by the lockdowns. The challenge to the longer-term growth outlook will be the ability of governments to differentiate between where the collapse in demand is temporary versus permanent.
  • Continued central bank purchases of government bonds have driven yields, and market volatility, ever lower.
  • A marginally improving global economic outlook could drive real yields higher this quarter, while inflation expectations could rise as increasing consumer demand meets supply constraints.

Macroeconomic Context

Thanks to the imposition of lockdowns across much of the world, the devastation wrought by the COVID-19 coronavirus has been much less than feared. Projections made in March by the Imperial College London were that a ‘do-nothing’ strategy could result in 550,000 deaths in the UK and 2.2 million deaths in the US. To avoid this outcome, it was advised that a combination of mitigation measures such as school closures, household quarantines and social distancing, maintained for several months, could reduce deaths to 48,000 in the UK over a two-year period and about 200,000 in the US. So far, the UK has suffered about 45,000 deaths and the US around 135,000. While distressing, these figures are similar to those seen during the Hong Kong flu in 1968 and the Asian flu in 1957.

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