Central banks start to ease

Bond yields continued their decline into June: prices rose as several central banks loosened their monetary policy stance, and the Reserve Bank of Australia (RBA) and the Reserve Bank of India (RBI) both cut their key interest rates during the month. The French, German, Swedish, Finnish, and Danish benchmark government bond yields ended the month in negative territory

  • The US yield curve remained inverted for the whole of June
  • Rhetoric from the Fed and the ECB became increasingly doveish
  • Demand for fixed income funds remained robust

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Bond yields continued their decline into June and prices rose as several central banks loosened their monetary policy stance. The Reserve Bank of Australia (RBA) and the Reserve Bank of India (RBI) both cut their key interest rates during the month. Meanwhile, the benchmark US Treasury bond yield dipped below 2% for the first time since 2016 amid mounting speculation that the Federal Reserve (Fed) could be contemplating a cut in interest rates as early as July. The Fed warned that downside risks to economic growth had intensified and, having inverted for the first time since March during May, the US yield curve remained inverted for the whole of June, compounding speculation that US economic strength might be wavering. Over June as a whole, the yield on the US ten-year Treasury bond dropped from 2.22% to 1.99%, having begun 2019 at 2.72%. 

 “The benchmark US Treasury bond yield dipped below 2% for the first time since 2016”

During June, European Central Bank (ECB) President Mario Draghi said that policymakers stand ready to cut interest rates or introduce fresh quantitative easing measures in order to shore up the region’s economic growth. The French, German, Swedish, Finnish, and Danish benchmark government bond yields ended the month in negative territory. In particular, the yield on German benchmark government bond remained mired in negative territory for the whole of June, falling from -0.27% to -0.40%, while the benchmark French government bond yield dropped from 0.12% to -0.39%. 

The global economic outlook is weakening, according to the World Bank, which cut its forecast for global growth in 2019 from 2.9% to 2.6%, before edging up to 2.7% in 2020. The World Bank attributes this deterioration in prospects to factors such as rising trade barriers, accumulating government debt, and worse-than-expected slowdowns in several major economies.  

Demand for fixed income funds remained robust during May, according to the Investment Association (IA), and the asset class retained its top-selling positon. The best-selling IA bond sector during the month was £ Strategic Bond, which was surpassed only by the Global equity sector. Investors’ appetite for funds in the UK Gilts sector and £ Corporate Bond sector also proved strong, and all three sectors appeared in the top ten best-selling sectors. In contrast, demand for funds in the Global Bonds sector dropped off sharply during May, and the £ High Yield sector also fell from favour.


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