Investors Love Bonds

Investors Love Bonds

over 4 years ago • 3 mins

Mentioned in story

Investors continued their love affair with US and European government bonds this week as central banks indicated they might lower interest rates this year.

🕰️ Recap

  • In March, the Bank of England said it wasn’t sure whether it’d raise or lower interest rates this year

  • Earlier this month, the US Federal Reserve said it might consider lowering rates in order to sustain the US’s economic growth

  • On Tuesday, the European Central Bank said it was considering rate cuts to boost the eurozone economy

  • On Wednesday, the Fed indicated it was likely to lower interest rates this year

  • And on Thursday, the Bank of England cut its economic growth forecasts – but said it might still increase rates this year

đź”— Connecting the dots

Investors have been buying up government bonds in earnest. Bonds of major economies like the UK, US, and Japan are considered incredibly safe investments – those governments can, if necessary, print more money to repay their debts. This recent demand for bonds pushed their prices up and yields down; some yields, such as those of 10-year US and German government bonds, hit lows this week not seen in years.

Last month, investors appeared to be selling off stocks to make room for bonds in their portfolios. Jitters around future global economic growth were likely to blame, given the raging trade war and its tariffs hitting companies’ profits and therefore share prices. Earlier this month, some investors began picking up stocks alongside bonds – perhaps in anticipation of the Fed’s update, which often sets the pace for the rest of the world’s central banks. Investors’ expectations of a future interest rate cut would have, if correct, made stocks appear to be a more attractive investment option.

Those investors were vindicated this week with the Fed and ECB both indicating they’re open to lower interest rates this year. And although the BoE cut a lonely figure in saying it might still increase UK interest rates this year, its lowered economic growth forecasts for the country perhaps means that’s now less likely than in March.

🥡 Takeaways

According to Bank of America’s monthly survey of several investment managers, who collectively steward $645 billion, many spent the last month bonding with bonds. They put the most money into the asset type since 2011, while equity investments fell to their lowest since 2009. For some investors, accepting a negative yield from bonds is preferable to the risk of greater losses from stocks.

A central bank’s mandate includes supporting a region’s economy – by controlling inflation in order to keep prices stable, for example, or by pulling financial strings to persuade companies to hire more people (or the opposite) in order to manage employment. But while central banks are politically agnostic, politicians’ demands – such as the US and Turkish presidents’ calls for lower interest rates in their respective countries – may muddy bankers’ policy waters and create the appearance of decision makers being politically swayed.

🎯 Also on our radar

Fresh data out on Friday showed that Japan’s manufacturing industry continued to shrink in June – and the prices of goods and services in the country rose more slowly in May than in April. Despite these signs of an economic slowdown, Japan’s central bank this week chose not to lower the country’s interest rates, ignoring cues from the US and Europe.

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