Global bond yields continue their downward trend, a phenomenon that can be attributed, we believe, to two things: easy central bank policy and Brexit-induced risk aversion.
Central banks continue to hold rates low
The U.S. Federal Reserve (Fed) affirmed its dovish stance in its latest meeting this month, keeping U.S. rates on hold and downgrading expectations for the pace of rate normalization. Europe’s Central Bank (ECB) continues to buy bonds, pushing bond yields lower. The Bank of Japan (BoJ) is keeping its policy steady, though we expect further non-traditional tactics are likely. In the below chart, we can see the actions taken by central banks and the resulting effects: a drop in short-term yields around the globe.
Ten-year U.S. Treasurys are approaching the lows of 2012 and Germany has joined Japan with negative 10-year yields.
Brexit fears pushing investors to sidelines
Investors with their eyes to the June 23 British referendum, in which voters will decide whether the U.K. remains part of the European Union (EU), are in full risk-off mode. ETF flows show European equities lost US$851 million; high yield saw outflows of US$1.96 billion, according to Bloomberg data June 11 through June 16.
We believe the Brexit vote will continue to be top of mind this week, as polls point to a marginal lead for those on the “leave” side.
A look at what’s ahead
The Fed is balancing sustained consumption growth and rising inflation pressures against global growth risks and slowing employment growth. We believe we’ll see one or perhaps two Fed rate increases by the end of the year.
We don’t expect the ECB to change course, but we think perhaps there will be an extension of quantitative easing and bubbles in assets that are interest-rate sensitive. We think the BoJ will likely ease further in July or September, but may intervene earlier to stabilize the yen in the event of a Brexit.
We have upgraded U.S. Treasurys and fixed income overall to neutral, and remain cautious on risk assets pending the U.K. vote.
Read more market insights in my Weekly Commentary.
Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.