Investment Weather Forecast: global bonds continue to find support

Global bonds braced for Fed lift off

The outlook for the global bond markets remains constructive in the near-term.

Although interest rates are likely to rise in the US at some point this year, the US Federal Reserve (Fed) will only move gradually, and rates will then likely rise to levels seen in previous tightening cycles.

The reason that they can be so measured, despite a marked improvement in the outlook for the US economy, is that inflation remains very low by historical standards, and we expect inflationary pressures to remain benign for the foreseeable future.

Elsewhere in the world, interest rates in major economies are likely to remain on hold, which will support bond prices.

The market will also be supported by unconventional central bank measures such as quantitative easing.

The European Central Bank has begun a long-term bond purchase programme, as has Japan, and these measures will keep downward pressure on bond yields.

US monetary policy

A major concern is that the Fed, in its desire to be slow and gradual, will leave monetary policy too loose and medium-term inflationary pressures will build.

US unemployment has fallen sharply over recent years, and we’re starting to see the signs of improving wage growth.

Increases in real wages will drive consumption and may push up inflation once the base effects from the commodity decline pass through.

Monetary policy works with a lag, and if the Fed waits until it sees signs of inflationary pressures building, it may need to hike more aggressively than the market expects, causing some adverse market movements.

Another concern is that debt levels among European countries have risen to unsustainable levels.

Much has been commented on Greece, but many other countries have debt levels that are too high, and when the next crisis or recession arises, then sustainability of those countries will be called into question.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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