Global bond market review: Rising risks to sovereign ratings

December 2018

After a challenging 2018, risks to sovereign ratings are set to intensify in 2019. According to credit ratings agency Fitch, global financial conditions are tightening, political and geopolitical factors could unsettle markets, and uncertainties surrounding US policy could affect the US dollar. 

  • The Fed raised its key interest rate by 25 basis points
  • President Trump continued to criticise the Fed 
  • The ECB wound up its monetary stimulus programme as scheduled

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After a challenging 2018, risks to sovereign ratings are set to intensify in 2019. According to credit ratings agency Fitch, global financial conditions are tightening, political and geopolitical factors could unsettle markets, and uncertainties surrounding US policy could affect the US dollar. 

“Fed now expects to raise rates only twice in 2019”

In the US, the Federal Reserve (Fed) implemented its fourth interest-rate increase of 2018 during December. Officials raised the federal funds rate by 25 basis points to a range of 2.25% to 2.5%, representing the ninth increase since the current cycle of tightening began in 2015. Looking ahead, the Fed now expects to raise rates only twice in 2019, rather than three times. December’s increase was widely anticipated; instead, investors were more unsettled by signs of continuing deterioration in the relationship between the Fed and President Trump, who tweeted: “The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!”. Over December as a whole, the yield on the benchmark US Treasury bond fell from 3.11% to 2.72%, having begun the year at 2.43%.

In Europe, the European Central Bank (ECB) wound up its programme of monetary stimulus measures at the end of 2018 as scheduled. Nevertheless, against a weakening economic backdrop, the ECB downgraded its economic growth forecast for 2019 to 1.7%, and policymakers confirmed that they will maintain their current stance for “as long as necessary”. Elsewhere, Italy finally agreed to revise its budget deficit target for 2019 in order to avoid financial penalties from Brussels. During December, the ten-year Italian government bond yield declined from 3.06% to 2.62%, having started the year at 1.93%. Meanwhile, the yield on the ten-year German government bond dropped from 0.28% to 0.17% during December, having started 2018 at 0.42%.

French authorities were forced to postpone unpopular increases in fuel taxes following fierce public protests. However, the move is likely to result in budget cuts, and President Macron subsequently unveiled a range of additional measures designed to boost households’ disposable income. Having started the year at 0.76%, the ten-year French government bond yield fell from 0.69% to 0.65% over December.


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