The US bond market moved sideways over the fortnight having correctly discounted a 50 basis point ri...
The US bond market moved sideways over the fortnight having correctly discounted a 50 basis point rise in interest rate on the 16 May. Yields on shorter maturity bonds are now near their February highs, while 30-year bond yields have been trading close to 6.2% for most of the month.
The market is discounting a rise in rates and the debt buy back programme is offering support, particularly to longer maturities. Equity market volatility is continuing to favour bonds but the market will require solid evidence of a slowdown in economic activity before rallying. With the Fed signalling it will get firmer, it might not take long to get there.
The UK gilt market has benefited from signs the economy is slowing and the short end has been supported by expectations interest rates will not need to rise much further.
The long end of the market was overshadowed by the auction of the new 4.25% 2032 stock. The market consolidated to a level where the auction was well received and has rallied back to be effectively unchanged over the period.
Gilts are well underpinned by the technical position and we expect the Debt Management Office to clarify the issuance programme when they announce the funding programme for the next quarter.
European bond markets have continued to digest the implications of the flows from the upcoming telecom license auctions. The major beneficiary has been the bund market, which has outperformed the other euro-denominated markets. The spread between Italy and Germany widened reaching 60 basis points in 30 year bonds before sanity returned and the spread narrowed back close to 40 basis points.
This volatility was not just confined to the Euroland bond markets; the Swedish market surged ahead on the expectation of strong flows to the Swedish treasury with government bonds trading as much as 20 basis points through Bunds in 10-year maturities.
Huge revenues are going to flow to governments throughout Europe, but the application of these funds needs to be clarified.
The Japanese bond market started the fortnight strongly, but now looks unchanged with the 10-year benchmark yielding 1.70%. This recent performance has reinforced our view that for the foreseeable future the market will continue to trade within a close range.
Yields around their four month low have deterred investors and signs of a pick-up in the economy have led to speculation the Bank of Japan will reverse its current policy and move rates higher.
While the bond market has shown good returns to overseas investors in the longer term much of this has been contributed by the strength of the yen and we feel the market has little attraction for the international investor.
Sofia Skalisgiri is a member of Capel Cure Sharp's fixed interest fund management team
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