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Global bond market review (September 2017)

Global bond yields rise in September

Global bond yields generally rose during September despite a backdrop of rising tension between North Korea and the US. The Fed confirmed that it intends to start cutting back its US$4.5 trillion balance sheet in October. Japan’s Prime Minister Shinzo Abe announced a stimulus package worth two trillion yen alongside a snap general election, triggering a drop in demand for JGBs.

  • Ratings agency Fitch confirmed Germany’s “AAA” credit rating
  • S&P downgraded China’s credit rating from “AA-“ to “A+”
  • Only 11 countries currently have an “AAA” rating from S&P

“The trend for global rating outlooks continues to improve”

Global bond yields generally rose during September despite a backdrop of rising tension between North Korea and the US. The yield on the ten-year US Treasury bond increased from 2.13% to 2.32% . The Federal Reserve (Fed) confirmed that it intends to start cutting back its US$4.5 trillion balance sheet in October. Elsewhere, the yield on the benchmark German government bond rose from 0.36% to 0.47% and the ten-year French government bond yield appreciated from 0.66% to 0.75% .

Demand for Japanese Government Bonds (JGBs) dropped following Prime Minister Shinzo Abe’s announcement of a two trillion yen stimulus package alongside a snap General Election. The yield on the ten-year JGB rose strongly over September as a whole, climbing from 0.01% to 0.05% .

The trend for global rating outlooks continues to improve and is, in general, “less negative” than at the beginning of 2017, underpinned by “the most benign credit market conditions in history”, according to ratings agency Fitch . Looking further ahead, these conditions will begin to unwind as the monetary backdrop starts to tighten. Other possible risks to the ratings outlook include uncertainty over US policy, a possible rise in protectionism, political instability in Latin America, and high levels of indebtedness in China. Ratings agency Standard & Poor’s (S&P) cut China’s credit rating from “AA-“ to “A+” in September, warning that China’s “economic and financial risks” have been stoked by rampant credit growth.

During the month, credit ratings agency Fitch confirmed Germany’s “AAA” credit rating and “stable” outlook, citing the country’s “diversified, high valued-added economy, strong institutions and history of sound public debt management”. According to S&P Dow Jones Indices , only 11 countries retain their prized “AAA” rating at present: Australia, Canada, Denmark, Germany, Liechtenstein, Luxembourg, the Netherlands, Norway, Singapore, Sweden, and Switzerland. Moreover, only two issues in the entire S&P 500 Index have “AAA” ratings: Johnson & Johnson and Microsoft.

Fixed income funds achieved net inflows of £993 million in August, according to the Investment Association (IA) , fuelled by strong demand for funds in the £ Strategic Bond, £ Corporate Bond, and Global Bond sectors. £ Strategic Bond was the third-best-selling IA sector, outstripped only by European Ex UK and Global. Every IA bond sector enjoyed net inflows in August apart from £ High Yield, which was one of the worst-selling sectors during the month.

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