A mood of tentative optimism blunted the attractions of government bonds during December. Yields generally rose as investors became more sanguine over the possibility of a short-term resolution to Brexit-related uncertainties, while the trade war between the US and China was put on pause as a preliminary “Phase One” trade deal was announced.
- Sweden ended its cycle of negative interest rates
- Japan, Switzerland & Denmark continued with negative rates
- Concerns remained over the outlook for Europe
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A mood of tentative optimism blunted the attractions of government bonds during December. Yields generally rose as investors became more sanguine over the possibility of a short-term resolution to Brexit-related uncertainties following Boris Johnson’s decisive victory in the UK General Election. Meanwhile, the trade war between the US and China was put on pause as a preliminary “Phase One” trade deal was announced.
“The benchmark JGB yield rose into positive territory for the first time since March”
The US Federal Open Market Committee (FOMC) and the European Central Bank (ECB) both kept their key interest rates unchanged during December. In Sweden, however, the Riksbank – which was the first major central bank to reduce interest rates to below zero back in February 2015 – increased its key rate from -0.25 to 0%, becoming the first country to bring an end to its cycle of negative rates. In contrast, central banks in Japan, Switzerland and Denmark continued with their negative-rate monetary policy.
The benchmark Japanese government bond (JGB) yield rose into positive territory for the first time since March, but subsequently subsided to end December at -0.02%. The yield on the benchmark US Treasury bond rose from 1.78% to 1.92% during December, having begun 2019 at 2.69%.
While concerns about Brexit subsided slightly – for the time being, at least – broader fears over the outlook for the European economy were exacerbated by disappointing economic data releases from Germany. The Bundesbank warned that Germany’s economic growth is likely to remain lacklustre into 2020 and the outlook for the country’s industrial sector is still weak. Despite this, the benchmark German government bond yield strengthened from -0.59% to -0.47% over December; having begun the year at 0.17%, the yield on the Bund fell into negative territory in May 2019. Elsewhere, the benchmark French government bond yield climbed from -0.40% to -0.30% in December, after starting 2019 at 0.65%, and the yield on the benchmark Italian government bond rose from 0.74% to 0.75% in December, having begun 2019 at 2.62%.
The global credit outlook will be influenced by a combination of slowing economic growth, low interest rates, and unprecedented levels of indebtedness, according to credit ratings agency Fitch, which believes that a sharp correction in equity markets could be a potential catalyst for a greater-than-expected downturn. Fitch warned that long-term valuations for US equities are close to historic highs, fuelling the possibility of a correction.
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