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Trade conflicts driven down yields

18th June, 2019

Bond yields fell during May as the trade conflict between the US and China took an unexpected turn. Both parties had been considered close to reaching a deal at the end of April; however, early in May, President Trump suddenly announced that he would raise tariffs on more than US$200 billion-worth of Chinese goods from 10% to 25%. In response, China increased tariffs on US$60 billion-worth of US goods from 1 June.

  • President Trump imposed tariffs on Mexican imports
  • The German benchmark government bond yield remained below zero during May
  • Demand for fixed income funds rose during April

Investors’ nerves were further tested towards the end of the month as President Trump decided to impose a rising tariff on Mexican imports. The news sent bond yields spiralling and the yield on the ten-year US Treasury bond fell to its lowest level since 2016.

Although the escalation in trade hostilities are not expected to result in higher near-term credit risk in the US, credit ratings agency Fitch believes that “shocks linked to widening protectionism” could undermine individual corporate credit ratings across multiple sectors, with industrial and technology companies particularly vulnerable.

Signs that leading central banks – including the US Federal Reserve (Fed) and the European Central Bank (ECB) – have halted tightening measures have exacerbated the decline in government bond yields. The yield on German benchmark government bond remained in negative territory for the entire month, falling from -0.10% to -0.27%, while the benchmark French government bond yield dropped from 0.24% to 0.12%. Over May, the yield on the US ten-year Treasury bond fell from 2.53% to 2.22%, and the US yield curve inverted for the first time since March, fuelling concerns about the possibility of recession. Elsewhere, Greek government bond prices surged and yields declined following Prime Minister Alexis Tsipras’s announcement of a snap general election. The yield on the benchmark Greek government bond fell from 3.13% to 2.92% during May.

Demand for fixed income funds rose during April, according to the Investment Association (IA), which interpreted the trend as a sign that investors are managing their portfolio risk. Sales of fixed income funds reached £1.6 billion in April and £2.7 billion over the first four months of the year. Global Bonds and £ Strategic Bond were among the most popular IA sectors during the month, and UK Gilts and £ Corporate Bond also appeared in the top ten. In contrast, demand for funds in the Global Emerging Markets Bond sector fell sharply.

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