Europe weakens

Demand for government bonds generally rose during April against a backdrop of intensifying concerns over the global economic outlook. Although economic growth rallied in the eurozone during the first quarter, Europe’s manufacturing sector continues to exhibit signs of pressure, and Germany’s economy is showing evidence of softening.  

  • Germany’s benchmark bond yield remained in negative territory
  • The German government cut its growth forecast for the domestic economy
  • The economic expansion in the US is the second-longest ever, according to S&P

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Demand for government bonds generally rose during April, against a backdrop of intensifying concerns over the global economic outlook. Although economic growth rallied in the eurozone during the first quarter – the euro area’s economy expanded at a quarterly rate of 0.4% following growth of 0.2% in the final quarter of 2018 – Europe’s manufacturing sector continues to exhibit signs of pressure. According to IHS Markit, the eurozone’s manufacturing sector contracted at its most dramatic rate for almost six years in March, undermined by concerns over trade, political uncertainties – including Brexit – and a weaker economic outlook. In particular, Germany – Europe’s largest economy – is showing evidence of softening and the country’s government has cut its forecast for economic growth this year from 1% to 0.5%. Although the yield on the German benchmark government bond rose during April, it remained in negative territory. Over the month as a whole, it climbed from -0.17% to -0.10%. Meanwhile the benchmark French government bond yield increased from 0.19% to 0.24%.

“Demand for fixed income funds jumped during March as Brexit-related uncertainties intensified”

Refinancing-related high yield bond issuance in the “BB” category rose in Europe during the first three months of 2019, according to Fitch Ratings, supported by shifts in US and European monetary policy. Looking ahead, ongoing momentum is likely to support “CCC” issuance in the second quarter. 

The current expansion of the US economy is the second-longest ever, according to S&P Global Ratings. However, its momentum could be curbed by trade conflicts, ongoing geopolitical concerns, and mounting risk aversion amongst investors. S&P believes that the key risks to credit conditions include trade issues and tightening financing conditions. Looking ahead, S&P expects the US economy to expand by 2.2% this year as the impact of President Donald Trump’s tax cuts diminishes and cumulative tightening of monetary policy takes effect. The yield on the US ten-year Treasury bond rose from 2.39% to 2.53% during April

Demand for fixed income funds jumped during March as Brexit-related uncertainties intensified, and fixed income experienced its strongest month since January 2018, enjoying net retail sales totalling £810 million. According to the Investment Association (IA), Global was the best-selling IA sector during the month, followed by £ Strategic Bond and Global Bonds. UK Gilts and Global Emerging Markets Bond also experienced positive demand. In contrast, investors’ appetite for funds in the £ Corporate Bond sector remained negative. 


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