Trade fears stoke bond yields

Global bond yields generally rose during July as escalating trade tensions undermined investors’ confidence. Nevertheless, despite concerns over the possible impact of the deepening trade wars, Federal Reserve (Fed) Chairman Jay Powell remains optimistic towards the economic prospects of the US. 

  • The US economy expanded by 4.1% YoY during Q2

  • The yield on the 10-year JBG surged during July 

  • Demand for global bond funds declined in June

Global bond yields generally rose during July as escalating trade tensions undermined investors’ confidence. Nevertheless, despite concerns over the possible impact of the deepening trade wars, Federal Reserve (Fed) Chairman Jay Powell remains optimistic towards the economic prospects of the US. The US economy posted annualised growth of 4.1% during the second quarter of 2018, representing its most rapid growth for almost four years. The country’s core rate of inflation climbed by 2% in June, fuelling expectations that Fed officials are likely to tighten rates in the near future. The yield on the benchmark US Treasury Bond rose from 2.83% to 2.97% during July. 

In the minutes from the Federal Open Market Committee’s (FOMC’s) June meeting, Federal Reserve (Fed) officials emphasised the importance of monitoring the yield curve, and what a flattening of the yield curve might indicate about the economic outlook. In the past, a flat or inverted yield curve has indicated a heightened risk of recession in the US. 

Credit ratings agency Fitch affirmed Spain’s rating at “A-“ with a “stable” outlook, citing Spain’s high valued-added and diversified economy and its “strong, relatively broad-based” recovery. Fitch also acknowledged negative factors such as Spain’s sizeable government debt, high rate of unemployment, and uncertainties persisting around Catalonia’s bid for independence. During July, the benchmark Spanish government bond yield eased from 1.30% to 1.24%. Elsewhere in Europe, the ten-year French government bond yield rose from 0.64% to 0.69% and the benchmark German government bond yield increased from 0.26% to 0.33%.

The yield on the benchmark Japanese government bond (JGB) surged from 0.02% to 0.06% over July, fuelled by speculation that the Bank of Japan (BoJ) might adjust its policy at its meeting at the end of the month. Policymakers introduced a policy of forward guidance on rates and also increased the range within which the yield on the ten-year JGBs is permitted to move.

Fixed income was the most unpopular asset class in June, suffering net retail outflows of £327 million, according to the Investment Association (IA). £ Strategic Bond was the worst-selling IA sector during the month; Global Bonds and Global Emerging Markets Bond suffered a substantial reversal of fortune and were among the least popular sectors over the month. In contrast, demand for funds in the £ Corporate Bond and £ High Yield sectors turned positive.