Central bank dovishness has sent a jolt through fixed income markets
Robin Wigglesworth in New York
The universe of negative-yielding bonds has jumped to a new record of $12.5tn, after the European Central Bank poured more fuel on the global fixed income rally by hinting that it could restart its “quantitative easing” programme.
The global bond market has been buoyed by rising concerns that economic growth is petering out, and bets that central banks in the US, Europe and Asia will all have to ease monetary policy to prevent another downturn. The resumption of trade hostilities between the US and China have stirred investor fears, and sent bond yields tumbling.
The Federal Reserve is expected to cut interest rates three times or more this year, and ECB president Mario Draghi on Tuesday indicated that the central bank might also trim rates and resume its bond-buying should inflation continue to languish well below its 2 per cent target.
The dovish comments from Mr Draghi sent another jolt through fixed income markets and pushed another $714bn worth of bonds into sub-zero yield territory on Tuesday. The market value of bonds trading at negative yields — once thought to be economic lunacy — to a fresh record of $12.5tn, according to Bloomberg data, surpassing the last peak in 2016. The average yield of the global bond market is now just 1.76 per cent, down from 2.51 per cent in November last year.
“ECB President Draghi used his keynote Sintra address to tee up a new phase of ECB easing with a clear default to act in the absence of a positive break in the outlook,” Krishna Guha, a strategist at ISI Evercore said in a note. “Unless the latest Trump-Xi maneuverings mark the beginning of a genuine and durable de-escalation of global trade-wars . . . the ECB will step up its stimulus in July-September.”
Large swaths of the European and Japanese government bond market has been trading with negative yields since 2016, but on Tuesday the French and Swedish 10-year yield sagged below zero for the first time. The equivalent German Bund yield stands at minus 0.29 per cent.
Traders are now widely anticipating that the Fed will also ease monetary policy, most likely starting in July. The Fed Funds futures market is pricing in a greater-than-even chance of three interest rate cuts by the end of the year, and a decent chance of a fourth one.
“The bar is certainly higher for Jay Powell to deliver a dovish surprise than it was for Draghi but he must certainly be feeling the pressure to do s,” said Kris Atkinson, a bond fund manager at Fidelity International. “In my view the case for immediate easing is weak given still decent growth and the upcoming G20 trade talks. My hunch therefore is that the Fed stands firm and awaits more data but of course, as shown yesterday, bold predictions on central bank actions have a tendency to age quickly.”
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