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Three reasons not to panic over changing economic conditions
A number of global factors have contributed to bond prices falling in the last week, but investors shouldn’t be overly concerned by the changing state of play, according to AMP Capital chief economist Shane Oliver.
Three reasons not to panic over changing economic conditions
A number of global factors have contributed to bond prices falling in the last week, but investors shouldn’t be overly concerned by the changing state of play, according to AMP Capital chief economist Shane Oliver.
Central banks in numerous countries have started displaying a “more hawkish tone”, Mr Oliver said, meaning they are moving to raise interest rates and tighten their economic policy.
US Federal Reserve chair Janet Yellen has indicated that it is now appropriate for interest rates to gradually rise, while Mario Draghi, the president of the European Central Bank, has said “the threat of deflation is gone”, Mr Oliver noted.
Additionally, the rally that bonds have enjoyed since the start of the year has “arguably gone a bit too far”, Mr Oliver said, leaving the asset class vulnerable to a drop in price.
However, he gave three reasons why investors shouldn’t panic too much by the drop in price.
The change in central bank attitude just matches market improvements
The declining likelihood of deflation and improving economic indicators that have seen bond prices take a tumble are actually good news for markets, Mr Oliver said, noting that global trade has increased, jobs markets have tightened and confidence is improving.
Monetary policy tightening is likely to be gradual
Underlying inflation is weak, as years of “below-trend growth” has left spare capacity in the market, and without “significant inflation pressures” present, central banks will presumably act gradually, he said.
Monetary policy is still a long way from ‘tight’
The US Fed’s interest rate hikes over the last two years have helped to tighten global monetary policy, but Mr Oliver said it’s still a long way from the levels that would bring “the bull market in shares to an end”.
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