Although the initial shock of the UK’s Brexit vote had time to wear off as July progressed, global bond yields remained under pressure. Against a backdrop of declining yields and low interest rates, demand for bond funds continued to rise as investors searched for returns amongst the relative safety of high-quality government bonds and investment-grade corporate bonds.
According to the Investment Association (IA) , Global Bonds was the most popular IA sector during June; Global Emerging Market Bond Funds were also among the most popular sectors during the month. Nevertheless, credit ratings agency Moody’s warned that debt in emerging markets is growing at a faster rate than their economies, making them vulnerable to external shocks. The countries with the largest increase in external borrowing are concentrated in the Asia Pacific region, and include China, India, Indonesia, Taiwan, and Malaysia.
Bond yields fell sharply in Europe in the wake of the UK’s Brexit decision, raising speculation that the European Central Bank (ECB) might opt to expand its programme of asset purchases. However, policymakers decided to leave both interest rates and quantitative easing measures unchanged at their July meeting until more information about the potential impact of Brexit becomes available. Nevertheless, ECB President Mario Draghi pledged to “act using all instruments available” if it becomes necessary. The yield on Germany’s ten-year government bond remained negative during July, falling from -0.13% to -0.18% .
During July, the US central bank opted to maintain its key interest rate at 0.25%-0.50%. The US economy registered slower-than-expected growth during the second quarter of 2016, expanding at an annualised rate of 1.2%. Although the news dampened speculation of an imminent increase in US interest rates, further tightening is widely expected in September ahead of the US Presidential elections in November. The yield on the ten-year US Treasury bond edged slightly higher over July as a whole, rising from 1.46% to 1.48% .
In a bid to boost Japan’s economic growth and curb the risk of deflation, central bank policymakers doubled their purchases of exchange-traded funds, but decided to leave interest rates unchanged and to maintain their programme of Japanese government bond purchases. Their decision proved disappointing for some investors. The yield on the ten-year Japanese government bond continued to slip further into negative territory in July, falling from -0.23% at the end of June to -0.27% .