Schroders Investment Weather Forecast: Global bonds continue to find support
Gareth Isaac discusses why the outlook for global bonds rests on central bank monetary policy and which areas of the market could come under pressure in the coming months.
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.
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. 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 Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.