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Update Bonds: Central banks dominate bond markets

The path of economic growth and the trajectory of interest rates have been topics keeping investors alert. While economic activity in the US remains robust, growth in Europe and the rest of the world, including some developing countries, has been slowing.
Update Bonds: Central banks dominate bond markets
Update Bonds: Central banks dominate bond markets

The path of economic growth and the trajectory of interest rates have been topics keeping investors alert. While economic activity in the US remains robust, growth in Europe and the rest of the world, including some developing countries, has been slowing.

The latest signal is that the US Federal Reserve intends to continue its gradual pace of interest rate hikes, and some fragile emerging markets, including Argentina, Turkey and Brazil, are adopting tightening measures as well.

The European Central Bank has signaled that no rate hike is likely before summer 2019, sending both European and German Bund yields lower. This situation is not like 2013, which was a difficult year for the bond markets, when the Fed was taking its first steps back to more normal rates and started to taper its accommodative monetary policy. Investors became alarmed and started drawing their money out of the bond market. In current markets, the government bonds of countries considered to be “safe”, including the US, Germany and Japan, continue to be calm, with bond yields trading in a low range. More risky fixed-income segments, such as emerging markets and high yield, are under pressure. But we do not expect a sell-off, such as was seen in 2013.

We expect that leading global government bonds will continue to trade in their set ranges. And while more risky assets could face further divergence due to sentiment, no full-blown correction is expected.

The situation in Italy, which is stabilising, remains fragile. The spread between Italian bond yields and German Bund yields are likely to stay at elevated levels. Risks remain, given that discussions between the EU and Italy are due in the autumn, when Italy is set to submit its fiscal budget to the EU.

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