Following interest-rate cuts in India, Thailand and New Zealand in August, central banks in Russia and Brazil cut their key interest rates during September. Bucking the trend, however, was Norway’s central bank, which implemented its fourth increase in interest rates so far this year
- The US federal funds rate was cut by 25 basis points
- Europe’s economic backdrop continued to weaken
- Fixed income funds experienced their first net retail outflows since December 2018
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Following interest-rate cuts in India, Thailand and New Zealand in August, central banks in Russia and Brazil cut their key interest rates during September. Bucking the trend, however, was Norway’s central bank, which implemented its fourth increase in interest rates so far this year, raising its key rate from 1.25% to 1.5%. Meanwhile, the US Federal Reserve (Fed) cut its key federal funds rate by 25 basis points during September to a range of 1.75% to 2%.
“The US yield curve remained inverted for the whole of September”
Although low borrowing costs have helped to alleviate political concerns over rising federal budget deficits and debt, credit ratings agency Fitch believes that US public finances could create a more pressing problem for US policymakers. If borrowing costs rise or the deficit increases, officials might have to cut spending; this could affect credit quality in sectors including US public finance, financial institutions, and industrials. Over September, the yield on the benchmark US Treasury bond rose from 1.50% to 1.66%, climbing as high as 1.90% during the month. The US yield curve remained inverted for the whole of September.
Europe’s economic backdrop continued to deteriorate during September as Germany’s manufacturing sector carried on contracting. The European Central Bank (ECB) revealed fresh quantitative easing measures in a bid to support the region’s flagging economic growth. From 1 November – when Christine Lagarde takes over as ECB President from Mario Draghi – the central bank will undertake monthly asset purchases of €20 billion, to continue for “as long as necessary” until inflation converges “robustly” with its inflation target of “below, but close to, 2%”. Having begun the year at 0.17%, the benchmark German Government bond yield remained firmly in negative territory during the month, rising from -0.92% to -0.78%.
Fixed income funds experienced their first month of net retail outflows since December 2018 during August, according to the Investment Association (IA), as the £ Strategic Bond sector went from being the most popular IA sector in both June and July to become the most unpopular in August. Demand for funds in the £ Corporate Bond sector also staged a sharp drop. In contrast, the Global Bonds and Global Emerging Markets Bond sectors were ranked third and fourth out of 36 IA sectors, and investors’ appetite for funds in the £ High Yield sector also picked up.
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