In February, a surge in inflation expectations in the context of strong global growth, combined with central banks hinting at upcoming additional rate rises caused a spike in government bond yields globally. As a result, fixed income assets have been volatile, but have held up far better than equities. Why?
Globally, government bond yields have remained incredibly low, despite the cyclical pick-up we have seen in economic growth in recent times. Nowhere is this more evident than the Eurozone, which continues to post strong economic data. We believe bond markets need to catch up with the fundamental reality.
Up until mid-June, UK gilts had performed robustly from a total return perspective in 2017, as 10 year yields edged down from 1.24% at the start of the year to hit 0.93% on the 14 June. This translated into a gain of 2.84% from the FTSE Gilts All Stocks Index over the same period. However, there has been a change in tone from developed market central banks of late.