Prospect of higher US rates drives down Treasury bond yield

Global Fixed Income

As the referendum over the UK’s future membership of the European Union (EU) drew closer, credit ratings agency Fitch warned that, if the UK were to leave the EU, a Brexit would “weigh on the economies of other EU countries and increase political risks”. In particular, a Brexit would cut the UK’s contribution to the EU budget – potentially to nothing – placing pressure on net contributors to increase their contributions, or on net recipients to accept lower expenditure. Moreover, fears that other countries might subsequently opt to exit the EU could widen bond spreads for “peripheral” countries.

The eurozone’s economic growth gathered pace during the first quarter of 2016; the region’s economy expanded at a quarterly rate of 0.5% during the period, compared with growth of 0.3% in the fourth quarter of 2015. Meanwhile, the rate of deflation eased from -0.2% in April to -0.1% in May. However, the European Central Bank (ECB) remains concerned about the sustainability of sovereign debt in the euro area, despite “relatively benign” financial conditions.

The yield on the ten-year German government bond declined during May, falling from 0.27% at the end of April to 0.14% . The yield on the ten-year French government bond also fell sharply over the month from 0.63% to 0.49% . Elsewhere, the benchmark Swiss government bond yield extended its reach into negative territory, deteriorating from -0.27% at the end of April to -0.31% .

Investor sentiment in Greece was boosted by the news that Greek leaders had managed to reach agreement with the country’s international creditors over the latest tranche of bailout cash. The yield on the ten-year Greek government bond yield eased from 7.23% at the end of April to 7.19%.