Market Update: Fixed Income

Government bond yields held steady in the US and UK but fell to all time lows in the EU last month, while riskier bonds under pressure following warnings from central banks

Andy Brunner 13 August, 2014 | 12:29PM

In fixed income markets, following a brief upward move in the first week in July, 10-year government bond yields in both the US and the UK – which remain inseparable – eased lower for the remainder of the month before ticking up again at month end. There was little in the US economic news to trigger another decline towards the lowest levels for over a year but demand remained strong with “safe-haven” buying on the escalation of hostilities in the Ukraine.

While the US/UK spread narrowed moderately, that with German bunds widened out again as German 10-year bund yields, as elsewhere in Europe, declined to all-time lows. With the euro area economy already so sluggish and inflation declining again, further sanctions against Russia only added to investor cautiousness. Once again, the long end of the curve outperformed in both the UK and US and being short duration has proven a very costly strategy year to date. In anticipation of higher “official” interest rates, US two-year treasury yields have jumped 8 basis points in both June and July and are now at their highest level for three years, causing a further flattening of the yield curve.

It was another good month for most EU peripheral bond markets and spreads over Germany narrowed once more. Yields are at all-time lows in most countries thanks to ECB backing; whether those levels of yields are justified by fundamentals is, of course, a far more debatable question. Even so, the peripheral markets, with the exception of Greece, produced another month of healthy returns as even Portugal performed well after a spike towards 4.0% on the ongoing saga at the Espirito Santo group.

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About Author

Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK

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