Bond rebound reliant on banks

Global bond yields experienced a small rally but remain uncertain as the market watches to see what central banks will do next.

AMP chief economist Shane Oliver says the recent slight resurgence of bonds was due to the downturn in the share market.

“While the US share market recovered some of its loss from the previous week as fears of an imminent Fed rate hike declined, other major share markets fell over the last week as bond yields generally rose further and they saw a catch up to the earlier fall in US shares,” he said.

As reported, despite low interest rates globally, growth continues to look sluggish with discussion around the introduction of fiscal policy likely prompting recent market activity.

“The back-up in bond yields (just a flick in a big picture context) and volatility in share markets over the last week or so in part has its origins in concerns that some central banks have hit the bottom of the monetary policy barrel and that the focus will now shift to fiscal stimulus,” Mr Oliver said.

With the market closely watching the European Central Bank, the Bank of Japan, as well as the possibility of a US rate hike later in the year, the forecast for bond remains unclear.

“The bottom line is that a shift in reliance away from monetary policy towards fiscal policy and structural reforms is desirable but it’s likely to be a gradual process and vary from country to country. It’s unlikely to justify a rapid back up in bond yields, more like a choppy bottoming, or sharp fall in share markets” Mr Oliver said.

“Ultra-low bond yields point to a soft medium-term return potential from them, but it’s hard to get too bearish in a world of fragile growth, spare capacity, low inflation and ongoing shocks. That said, the bond rally this year had taken yields to pathetic levels leaving them at risk of a snapback, which we are now seeing.”

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