What’s driving the bond rally?
Alex Stanley takes a closer look at the drivers of the recent bond rally.
Key points for this note:
- Bond yields hit five-month lows in July, reversing much of the Q1 sell-off and confounding consensus.
- Lower yields partly reflect concerns over a rise in global Covid case numbers.
- There are, however, many other factors at play, including positioning technicals, a sense of data “peaking” in large economies and a perception that central banks will cap upside inflation risks.
- Long term forward rates at current low levels imply a pessimistic outlook for growth or a view that structural headwinds have significantly lowered the neutral policy rate.
- Market narratives can change quickly – the path for growth, inflation and QE tapering over coming months can challenge current low rate pricing.