June 2018
Demand for investments perceived to be “safe havens” – such as US Treasury Bonds, the Japanese yen and the Swiss franc – was boosted during the month by concerns over the impact of trade wars initiated by the US. Elsewhere, the US Federal Reserve raised its key federal funds rate by 0.25 percentage points to a range of 1.75% to 2%.
- The ECB will end its programme of asset purchases in December
- US inflationary risks may be on the rise
- Investors favoured bond funds with global exposure during May
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Demand for investments perceived to be “safe havens” – such as US Treasury Bonds, the Japanese yen and the Swiss franc – was boosted during the month by concerns over the impact of trade wars initiated by the US.
“Fed policymakers are expected to implement another two increases this year, followed by three next year”
The US Federal Reserve (Fed) raised its key federal funds rate by 0.25 percentage points to a range of 1.75% to 2%. The move was widely anticipated, and Fed policymakers are expected to implement another two increases this year, followed by three next year. The yield on the benchmark US Treasury Bond fell from 2.86% to 2.83% during June.
Credit ratings agency Fitch believes that US inflationary risks are mounting and present a “key risk” to the global economic outlook. Fitch expects the rate of US unemployment to reach a 66-year low in 2019. This could not only drive up wages, but also directly affect US and global bond yields. Looking ahead, Fitch predicts global normalisation in monetary policy and upward pressures on the US dollar to continue to stoke volatility in financial markets.
The European Central Bank (ECB) confirmed that it would end its programme of asset purchases at the end of 2018 as long as the economic outlook remains positive. In the meantime, its bank’s bond-buying programme will halve from €30 billion per month to €15 billion per month. Ratings agency Standard & Poor’s (S&P) affirmed its “AA/A-1+” rating for the EU alongside a “stable” outlook reflecting its belief that the capacity and willingness of the EU’s net contributor member states towards the EU budget will remain in place. S&P expects the proportional contributions of wealthier members will increase in order to replace those caused by the UK’s departure, and that Brexit will not necessarily weaken the union. The ten-year French government bond yield declined from 0.70% to 0.64% during June, while the benchmark German government bond yield eased from 0.28% to 0.26%.
UK investors appeared to favour bond funds with global exposure during May, according to the Investment Association (IA). While the £ Corporate Bond and High Yield Bond sectors experienced outflows, the Global Bond and Global Emerging Market Bond sectors enjoyed positive net inflows. The £ Strategic Bond sector was the best-selling fixed-income sector during the month; inflows into the sector were particularly concentrated amongst global funds rather than those with high levels of UK exposure.
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