The global bond market came under pressure towards the end of June. Bond yields surged and prices fell, undermined by rising speculation that central banks might start to tighten monetary policy. The euro reached its highest level against the US for more than a year.
- Deflationary forces in the eurozone are being replaced by reflationary forces, according to ECB President Mario Draghi
- Several leading central banks have adopted more hawkish tones
- Moody’s upgraded its sovereign bond rating and outlook for Greece
The global bond market came under pressure towards the end of June. Bond yields surged and prices fell, undermined by rising speculation that central banks might start to tighten monetary policy. In particular, recent statements from the Bank of England (BoE) and the European Central Bank (ECB) have fuelled expectations that borrowing costs might start to rise.
“The euro surged to its highest level against the US dollar for over a year”
Investors took particular note of ECB President Mario Draghi, who remarked that deflationary influences in the eurozone were being replaced by reflationary forces. His comments triggered speculation that the ECB might be considering winding down its economic stimulus programme; nevertheless, he stated that the ECB should continue to provide a “prudent” level of support until inflation becomes “self-sustaining”. The benchmark French government bond yield rose from 0.73% to 0.83% in June, while the ten-year German government bond yield surged from 0.29% to 0.47%.
The euro surged to its highest level against the US dollar for over a year and the yield on the ten-year Treasury bond rose from 2.21% to 2.28% during June. The US Federal Reserve (Fed) raised its key interest rate by 0.25 percentage points in June and intends to start reducing its balance sheet later in the year.
Ratings of eurozone sovereigns have only “tentatively” recovered since the beginning of 2012, according to ratings agency Standard & Poor’s (S&P) . The average rating of eurozone sovereigns has improved but little from its lowest point and now stands just below “AA-“, which is two notches below pre-crisis levels. Although the region’s economy has improved, sentiment is weighted down by political uncertainties and rising levels of euroscepticism. Moreover, S&P believes that, although the ECB’s unconventional monetary policy has helped the region to recover, it has also undermined the political will for pro-growth reforms.
Credit ratings agency Moody’s upgraded Greece’s sovereign bond rating to “Caa2” and changed its outlook from “stable” to “positive”. Moody’s decision was underpinned by the news that European finance ministers had finally managed to reach an agreement to release the next tranche of Greece’s bailout funds. The deal is regarded as a positive step towards the important reform measures that Greece is required to implement; in turn, this bodes well for the likelihood of further debt relief. Over June as a whole, the yield on the ten-year Greek government bond eased from 5.98% to 5.36%.
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