Fixed income markets have become even more unimaginable as interest rates head lower and the amount of debt with yields below zero higher -- the amount of negative yielding bonds now tops US$17 trillion, which is over a quarter of the global bond market. Bond yields continue to lower because of the shift back to quantitative easing (QE) by central banks this year. The US Federal Reserve cut its main interest rate in July while other central banks continue to debate QE and some suggest negative rates could happen.
Rather than centuries of experience of managing the flat-lands, only a juvenile decade has passed since the Great Financial Crisis felled interest rates, $13tn and counting of bonds trading at sub-zero rates now standing in for economic life below sea-level. However, unlike the Dutch, there is little evidence that swamp drainage is a virtue which the captains of the world’s central banks can lay claim to.
Until recently, the Bank of England had been looking upwards since last raising the official interest rate in November 2017. It sent messages for months that a ‘gradual, limited’ rise in interest rates would be needed to stop inflation rising above its 2% target and this led LIBOR (London Inter-bank Offered Rate) rates to edge up as the markets anticipated another hike. Floating Rate Notes (FRNs) – bonds that have short durations and reset their coupon as rates move – were in great demand during this period.
The Sino-US trade and tech war has entered a new and more concerning phase as July marked the first anniversary of its initiation – when President Trump imposed a 25% tariff on $34 billion worth of Chinese goods. A year of on-and-off negotiations – and respective up-and-down headlines driving the markets – has seen this escalate to some $300 billion now.
While Brexit has continued to hit the UK property market, several underlying trends are starting to paint a different picture, particularly in the central London office market where its expanding skyline is proving more resilient than expected. Research conducted by the Financial Times earlier this year, for instance, showed that London’s top 15 banks have collectively cut fewer than 3,500 jobs in the UK capital since the Referendum. The FT’s report said this is only 5% of the 15 banks’ City headcounts and that fewer than 1,500 of those moves were linked to Brexit.