Uncertainty Kills: Volatile Bond Markets Persist
In recent months, global bond markets have rallied due to the expectation of lower interest rates and less-rigid Fed and ECB policy. However, recent economic data in the US and Europe suggest that the central banks must continue to hike interest rates to combat inflation. In the US, the January jobs report spooked investors as employers added over 500,000 new jobs, suggesting that the labor market remains extremely tight. With employers struggling to find workers, they must increase wages, and this creates persistent inflation. Thus, the Fed must continue to hike interest rates for the remainder of 2023.
Due to the inverse relationship between interest rates and bond prices, US fixed income investors are worried about the current path of global monetary policy. Before the January jobs report, investors were optimistic about future interest rates. However, this all came crashing down and the US bond market rally has tapered off. According to the Financial Times, emerging bond markets have seen the biggest outflows of capital since October, when higher inflation expectations were running rampant. The FT writes that “more than $7bn has leaked out of “junk” rated corporate bond funds so far in February.”
However, the bond market looks slightly different in Europe. Despite persistent core inflation in the Eurozone, capital outflows in the US have been working in the European fixed income market’s favor. For the first time since a brief period in 2020, European bond markets are seeing positive inflows of fixed income investments.
While the European Business Club is investigating fixed income opportunities in Europe, persistent core inflation data is still worrisome. For now, the EBC will maintain our course of equity investments.
Sources:
https://www.ft.com/content/b287997b-a048-426c-bab3-9a6a97486c17