Fears of an economic slowdown in Europe rattled investors during March, and European government bond yields fell as investors sought perceived safe havens. Economic sentiment in the euro area deteriorated over the month, according to research undertaken by the European Commission; Brexit-related uncertainties may also be fuelling demand for lower-risk assets.
- US interest rates are not expected to rise this year
- Germany’s benchmark government bond yield fell into negative territory
- S&P upgraded Portugal’s credit rating
To view the series of market updates through March, click here
Fears of an economic slowdown in Europe rattled investors during March, and European government bond yields fell as investors sought perceived safe havens. Economic sentiment in the euro area deteriorated over the month, according to research undertaken by the European Commission; confidence was undermined by “markedly lower confidence” towards industry, and to a lesser extent towards the services sector. Brexit-related uncertainties may also be fuelling demand for lower-risk assets. March also saw rising speculation that the European Central Bank (ECB) might be considering implementing a tiered deposit rate in a bid to alleviate pressure on banks against a backdrop of sluggish economic growth. The yield on the German benchmark government bond fell into negative territory, declining to its lowest level since the latter half of 2016 and, over March as a whole, it dropped from 0.05% to -0.17%. Meanwhile, the benchmark French government bond yield fell from 0.49% to 0.19%.
“Concerns over the outlook for the US economy were compounded by an inversion of the US yield curve”
Ratings agency Standard & Poor’s (S&P) raised its rating on Portugal from “BBB-/A-3” to “BBB/A-2”, with a stable outlook. Credit conditions have improved, and S&P expects the level of government debt to GDP to continue its decline as the economy expands; however, private external debt remains high. Portugal’s economy is forecast to expand by between 1.5% and 1.7% over the next three years. The yield on the Portuguese short-dated government bond maturing in 2023 fell from 0.14% to 0.06% over March.
Concerns over the outlook for the US economy were compounded by an inversion of the US yield curve, in which the yield on the three-month Treasury bond rose above that of the ten-year Treasury bond – something that is often regarded as the precursor to recession. The yield on the US ten-year Treasury bond declined from 2.70% to 2.39% during March.
US interest rates are now not expected to rise at all in 2019, according to the Federal Reserve (Fed). Moreover, according to credit ratings agency Fitch, the Fed’s decision to taper its balance-sheet reduction from May, and stop reducing assets altogether after September, suggests a much shorter period of balance-sheet normalisation – and a higher level of Fed asset holdings over the medium term – than previously implied. Fitch believes that global tightening will be “a lot less intense than expected and may even be completely off the agenda this year if the ECB restarts net asset purchases”.
A version of this and other market briefings are available to use in our newsletter builder feature. Click here
