Global bond market review: The Fed’s new approach

The US dollar weakened against the pound and the euro as Fed Chair Jerome Powell announced a new inflation strategy designed to give central bank policymakers more flexibility by allowing interest rates to remain lower for longer.


  • The Fed will aim for an average inflation rate of 2%
  • Fitch downgraded its outlook for the US from “stable” to “negative”
  • Demand for bond funds rose in July

The US dollar weakened against the pound and the euro as Federal Reserve (Fed) Chair Jerome Powell announced a new inflation strategy designed to give central bank policymakers more flexibility by allowing interest rates to remain lower for longer. Rather than focusing on a fixed target of 2%, the Fed will aim for an average inflation rate of 2%, enabling it to run “moderately above 2% for some time”.

“German government bond yields climbed to their highest level since the start of June”

The ten-year US Treasury bond yield rose from 0.55% to 0.72% during August. Meanwhile, German government bond yields climbed to their highest level since the start of June following the Fed’s announcement, and the yield on the ten-year German government bund increased from -0.53%  to -0.40% over the month.

At the annual Jackson Hole symposium – held virtually this year in response to the coronavirus pandemic – Fed Vice Chair Richard Clarida said that there are no plans to tighten policy in response to a recovering labour market, and also maintained that the Fed is not considering yield curve control.

Credit ratings agency Fitch affirmed its sovereign rating for the US at “AAA”, citing structural strengths including the size of the economy, high per-capita income, a “dynamic” business environment, and the US dollar’s status as the world’s preeminent reserve currency. However, Fitch downgraded its outlook for the US from “stable” to “negative”, reflecting the continued deterioration in the country’s public finances and the absence of a “credible fiscal consolidation plan”.

Having risen sharply at the start of the Covid-19 pandemic, the pace of sovereign downgrades and “negative” outlook revisions has eased considerably since June, and Fitch expects this trend to continue. Although sovereign credits remain vulnerable to “significant” pressures, the proportion of “negative” outlooks leading to a subsequent downgrade may be below the historical average.  

Bonds were the most popular fund asset class amongst UK retail investors during July as dividend cuts forced equity income investors to look elsewhere for yield. The Investment Association (IA) reported net retail sales of £1.8 billion into bond funds and Global Bonds was the best-selling sector with net retail inflows of £693 million, closely followed by £ Corporate Bond with inflows of £692 million. In comparison, equity funds experienced outflows of £609 million as demand for funds in the UK Equity Income sector and the mainstream UK All Companies sector remained weak.


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