The fourth quarter of 2019 was the mirror image of the final months of 2018. The decade ended on a high note – or a low note, if you are focused on the level of credit spreads. At the end of 2018, fears of a slowing global economy drove credit spreads wider and interest rates lower. The U.S. Federal Reserve also raised interest rates at its final meeting of 2018, extending a tightening cycle it started three years earlier. Those trends began to reverse in 2019: The Fed adopted a more accommodative stance, the moderation in economic growth was not as drastic as feared and trade tensions eased toward the end of the year.

While the summer months are supposed to be a time to relax, the third quarter proved to be a stressful period for fixed income and pension managers. In August, the 10-year U.S. Treasury bond tested the lower bound of the 1.50%–3.00% range in which its yield has fluctuated since 2011 as concerns about global growth permeated the market. In addition, communications from the U.S. Federal Reserve’s July rate-setting meeting left investors wondering whether the central bank was committed to further easing. This drove spreads wider and rates lower, but the move in rates dominated and ultimately drove down pension plan discount rates even further.

Central banks continued to play a pivotal role in guiding investor sentiment during the second quarter. Signs of slowing growth, increased market volatility and trade tensions were enough to convince them that potential downside risks warranted a response. At its June meeting, the U.S. Federal Reserve clearly articulated the potential for policy rate cuts in the second half of 2019. The European Central Bank and the Bank of Japan conveyed similar messages. This shift improved investor sentiment and drove credit spreads lower; they finished the quarter slightly below where they began.

Global economic momentum decelerated in the fourth quarter. An inversion of two- and five-year yields and shifting growth expectations contributed to significant stock market volatility and wider credit spreads. Long duration investment-grade corporate bond spreads widened 47 basis points to 200bp, mostly due to falling U.S. Treasury yields.