Global bond yields continued to rise throughout March as expectations for economic growth and inflation were bolstered by the global Covid-19 vaccination rollout and the passing of US President Joe Biden’s US$1.9 trillion Covid relief stimulus package.
- The ECB remains ready to expand its asset purchase programme
- 2020 saw a record number of sovereign downgrades
- The pandemic has undermined credit fundamentals
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Global bond yields continued to rise throughout March as expectations for economic growth and inflation were bolstered by the global Covid-19 vaccination rollout and the passing of US President Joe Biden’s US$1.9 trillion Covid relief stimulus package. The yield on the ten-year US Treasury bond ended March at 1.74% compared with 1.42% at the end of February and 0.93% at the start of the year.
“Fallout from the pandemic has stretched macroeconomic policy frameworks”
The European Central Bank (ECB) indicated that it could increase its total asset purchases, if necessary, in order to avoid any tightening in financing conditions that could undermine economic recovery and sentiment. The yield on the benchmark German government bond ended March at -0.30% compared with -0.26% at the end of February and -0.56% at the beginning of 2021.
The impact of the coronavirus pandemic resulted in a record number of sovereign rating downgrades and sovereigns placed on a “negative” outlook over the past year, according to credit ratings agency Fitch Ratings. During 2020, Fitch downgraded 33 sovereigns, reflecting the “widespread deterioration” in credit fundamentals, and currently has 38 sovereigns on a “negative” outlook. Historically, 63% of sovereigns on a “negative” outlook have subsequently suffered a rating downgrade; however, Fitch found that the conversion rate tends to be lower during and after crises. Fallout from the pandemic has stretched macroeconomic policy frameworks; looking ahead, Fitch expects it to continue to affect public finance positions for some time to come.
Sovereign borrowing is set to reach US$12.6 trillion in 2021, according to S&P Global Ratings; this is 20% lower than in 2020, but still 50% above the pre-coronavirus multi-year average. The additional cost of supporting their economies through the pandemic is predicted to reach US$10.9 trillion in 2020 and 2021, equating to more than 13% of global GDP in 2020. Total commercial debt is forecast to rise to a record US$67.5 trillion by the end of the year. S&P Global Ratings highlighted the need for governments to stabilise their public finances or risk placing downward pressure on sovereign ratings.
Fixed income remained the most popular asset class in February, according to the Investment Association (IA), accounting for more than half of all inflows. Nevertheless, Global Bonds was the worst-selling IA sector during the month, experiencing outflows of more than £987 million. In comparison, demand for gilt and index-linked gilt funds rose strongly.
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