European Recovery: Implications for Bonds

Improvement in economic conditions in Europe has led to a fall in German government bond prices

T. Rowe Price 4 September, 2013 | 2:49PM
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This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, David Stanley, manager of the T. Rowe Price Euro Corporate Bond fund 

At last, we are witnessing some signs of economic recovery in Europe. Second quarter GDP saw a return to growth, helped by industrial production and a temporary reduction in fiscal tightening. Eurozone PMI data for August subsequently rose for a fifth month running, adding to evidence that the Eurozone recovery is gaining momentum. Importantly, the improvement is broad based with Germany rebounding strongly with periphery countries also registering significant improvement but still not out of recession for the most part.

Improvement in economic conditions in Europe coupled with the Fed’s intention to start tapering its asset purchase program in the coming months has led to a fall in German government bond prices, This has subsequently caused a re-pricing of Euro corporate bonds. While investment grade Euro corporate bonds were offering a modest 1.75% yield to maturity back in May, the market has now corrected and today offers a more attractive income of nearer 2.3%.

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T. Rowe Price  T. Rowe Price is a global investment management firm dedicated to helping clients achieve long term success.

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