Bond yields drop as inflation proves a double edged sword for central banks


Craig Inches, Head of Short Rates and Cash

12 July 2017

Despite some hawkish hints in recent weeks, dovish comments from central bankers and inflation concerns have pushed global government bond yields lower today.
Inflation is proving to be a double edged sword, with real wage growth in negative territory thanks to a slew of strong UK inflation data. Until this picks up, the Bank of England (BoE) is unlikely to believe that consumers can stomach higher rates any time soon. In the US it is low inflation that’s a cause for concern, with Janet Yellen acknowledging that uncertainty remains about prices rising in response to a strengthening economy. 
In our view the BoE and the US Federal Reserve (Fed) are unlikely to deliver any kneejerk changes to their current monetary policy path, particularly as the Fed turn their attention to balance sheet reduction and the European Central Bank contemplate a tapering of their asset purchasing programme. The Fed is likely to hold off until December before raising rates again. Meanwhile as Brexit and its potential for investment uncertainty remain at the forefront of the BoE’s mind, we expect it unlikely that the BoE will favour a rate hike before negotiations are concluded. Against this backdrop, we are forecasting only a small increase in gilt yields before the end of this year.

Despite some hawkish hints in recent weeks, dovish comments from central bankers and inflation concerns have pushed global government bond yields lower today.

Inflation is proving to be a double edged sword, with real wage growth in negative territory thanks to a slew of strong UK inflation data. Until this picks up, the Bank of England (BoE) is unlikely to believe that consumers can stomach higher rates any time soon. In the US it is low inflation that’s a cause for concern, with Janet Yellen acknowledging that uncertainty remains about prices rising in response to a strengthening economy. 

In our view the BoE and the US Federal Reserve (Fed) are unlikely to deliver any kneejerk changes to their current monetary policy path, particularly as the Fed turn their attention to balance sheet reduction and the European Central Bank contemplate a tapering of their asset purchasing programme. The Fed is likely to hold off until December before raising rates again. Meanwhile as Brexit and its potential for investment uncertainty remain at the forefront of the BoE’s mind, we expect it unlikely that the BoE will favour a rate hike before negotiations are concluded. Against this backdrop, we are forecasting only a small increase in gilt yields before the end of this year.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.