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Bond and currency markets remain under pressure

July 2017

Despite a backdrop of persistently low inflation, speculation over the likelihood of tighter monetary policy continued to put pressure on global bond and currency markets during July. The Fed is expected to begin cutting back its balance sheet soon; meanwhile, the ECB is trying to curb speculation that it intends to wind down its programme of economic stimulus measures.

  • The Bank of Canada increased its key interest rate for the first time since 2010.
  • S&P upgraded its rating on Greece from “stable” to “positive”
  • Investors are nervous about the possibility of policy mistakes by central banks

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Despite a backdrop of persistently low inflation, speculation over the likelihood of tighter monetary policy continued to put pressure on global bond and currency markets during July. The US Federal Reserve is expected to begin cutting back its balance sheet soon; meanwhile, the European Central Bank is trying to curb speculation that it intends to wind down its programme of economic stimulus measures.

“Speculation over the likelihood of tighter monetary policy continued to put pressure on global bond and currency markets”

Nevertheless, investors believe that a crash in global bond markets or policy mistakes by leading central banks pose the biggest risks to financial markets, according to the Bank of America Merrill Lynch July Fund Manager Survey . The yield on the ten-year US Treasury bond edged up from 2.28% to 2.30% during July, while the ten-year German government bond yield rose from 0.47% to 0.55% .

The Bank of Canada (BoC) increased its key interest rate for the first time since 2010 during the month, citing an outlook of “above-potential growth and the absorption of excess capacity in the economy”. Canada’s labour market has strengthened steadily and property values have risen. BoC officials implemented an increase of 0.25 percentage points, taking the central bank’s benchmark rate to 0.75%. The ten-year Canadian government bond surged from 1.75% to 2.06% over July.

Ratings agency Standard & Poor’s (S&P) upgraded its rating on Greece from “stable” to “positive” during July, and reaffirmed its “B-“ long-term rating. S&P cited the country’s “recovering economic growth… legislated fiscal reforms and further debt relief (which) should enable Greece to reduce its general government debt-to-GDP ratio and debt serving costs through 2020”. The yield on the ten-year Greek government bond fell from 5.36% to 5.20%.

After a record year for sovereign downgrades in 2016, the global sovereign credit cycle turned less negative in 2017, according to ratings agency Fitch . Fitch cited factors including a concerted improvement in global economic growth forecasts, stabilising commodity prices, and a “broadly accommodative” global macroeconomic policy backdrop. However, headwinds remain, including “high and still-rising government debt levels”. At the end of June 2017, 17 sovereigns were on a “negative” outlook, with nine on a “positive” outlook.

Credit ratings agency Moody’s reported that, of the US$1.84 billion cash pile held by US non-financial companies, 87% of the pile is held by investment-grade companies, and the top-five cash hoarders can all be found in the technology sector, led by Apple.

 


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