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Volatility remained the order of the day for yields on Eurozone government bonds, and the volatility witnessed towards the latter stages of 2017 and early trading sessions of 2018 showed no signs of abating. Yields on European sovereign bonds trended higher resulting in the European government bond market losing ground, with the Malta Government Stocks losing an aggregate 0.43% during the month of February.
Yields on Malta Government Stocks continued to perfectly mirror the movement in their European counterparts, and this was reflected in the performance of the Malta Government Bond Fund during the month of February.
Investors at the higher end of the ratings ladder, particularly within the sovereign and investment grade space, are wary of the weakness of the bond market, and this has been dwindling on their investment decisions. With US Treasuries and Bunds creeping notably higher during the month, market participants are aware that more monetary policy normalisation is in store in the US and Europe, and may add to investor’s woes about concerns regarding the longevity of the multi-decade bull market.
Both the Federal Reserve (Fed) and the European Central Bank (ECB) agreed on the fact that benign global economic growth is in place, in addition to the relative upward moves in inflation from the previous stagnant phase. Indeed, this was the common factor communicated in the latest minutes published by the two prominent Central Banks. However, the risk assessments do diverge and thus it is fascinating to contrast these major possible risk factors.
What remains key at this stage is the way central banks manage to satiate investor expectations on one hand and control the possible spill-over to risky assets. Investors are not anticipating any rate hikes till at least 2019 in the EU, however we can’t oversee the improving economic situation, as evidenced by recent economic data releases. In addition, interest rates and the size of the QE program are expected to take centre stage in 2018. We are of the opinion that Eurozone bond yields will slowly grind higher as a result of persistent global growth, and a probable tapering of the ECB’s stimulus program.
As we head towards end of the first quarter of 2018, we should continue to see a relatively stable momentum within the bond market, as investors should continue to hold on tight to the carry trade. Undoubtedly, monetary tightening is one of the elements to look at as well as movement in external currencies, so central bank chatter and activity are expected to continue to dictate market sentiment. However, in the absence of any marked systematic shocks, fixed income per se still remains well supported.
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