Bonds react to the Fed taper decision – Interactive Data

Interactive Data’s latest report provides global markets’ outlook for the month of September.

In the US, the Federal Reserve decided to maintain its current level of bond purchases this month, surprising many who had anticipated a reduction. Nevertheless, several central bank officials were quoted as saying that the decision had been a close one, with tapering still a possibility by year end.

Towards the end of the month, monetary policy was overshadowed by political gridlock in Washington. While the federal budget and government shutdown dominated investor attention this month, another crisis loomed just over the horizon, with the impending debt ceiling representing a potentially detrimental risk to financial markets. Although fixed income investors showed general concern, yields on the benchmark US 10yr were relatively stable, hovering between 2.63% and 2.67% over the last several days of September, but still comparably lower than the intra-month high of 2.98% notched at the beginning of the month.

Major European government bond yields were also down on the month. Yields on the German 10yr government benchmark bond declined by about 11 bps on the month from 1.85% to 1.74% having peaked at 2.04% on September 10 when the US agreed to defer its military action against Syria. The UK 10 year government benchmark yield also dropped on the month, from 2.78% to 2.73% having peaked at 3.03% on September 10.

In Germany, the decisive win of the CDU/CSU party in the elections on September 22 and Angela Merkel’s third term as Germany’s Chancellor foretold the status quo in the continuation of post-Crisis austerity policies toward stabilization of the Eurozone, with Germany retaining a dominant role. Its main political partner, the FDP, failed to secure any seats in the parliament which led to Chancellor Merkel attempting to form a coalition with the Social Democrats (SPD).

There was mixed news from peripheral European countries. Spain emerged from a 2-year recession and the Spanish 10 year benchmark bond yield ended the month lower for the third month in a row, dropping from 4.53% to 4.31% in September. Greek debt experienced modest price appreciation following a pause in negotiations between Greece and the Troika regarding a potential third round of bailouts. The Greek benchmark 10yr bond yield dropped 1.09% in September to 9.70%.

Meanwhile, in Portugal, there are increasing concerns that the country could need yet another bailout. S&P put Portugal on credit watch negative, citing risks to the economy from rising taxes and spending. Unemployment in Portugal is amongst the highest in the Eurozone. Yields on the benchmark 10-year Portuguese government bond rose from 6.71% to 6.80%. Some shorter dated securities however were down in yield on the month with the 5 year benchmark 19bp lower at 6.18%.

In Italy, Silvio Berlusconi pressured his PDL centre-right party’s 5 ministers to quit from an already fragile coalition which they did on 27 September, frustrating attempts to end a two year recession in the third largest Eurozone. Prime Minister Letta refused to accept the resignations and called a vote of confidence at the beginning of October. The 10 year benchmark government bond yield subsequently increased by 22bps in the last three business days of September. On the month, the bond yield rose 7 bps from 4.25% to 4.32%.

Emerging Markets were boosted by the US Fed’s decision to keep their bond buying program at the current level on September 19 with a general improvement in prices over the month. The Nigerian USD 6.275% 2023 bond yield dropped 15bp in September to 6.01%. The Russian USD 4.5% 2022 bond yield was down 30bps to 4.2%. Israel’s government bonds also improved on the month following the avoidance of US action against Syria. The EUR 8 year bond yield dropped from above 2.2% on September 10 to 2.04% at month end.

After a turbulent August in the Indian markets, the government appointed former IMF chief economist Raghuram Rajan as governor of the Reserve Bank of India which was widely seen as a positive move. His first decision was to raise Indian interest rates by 25bp to 7.25%. Yields on India’s INR 10yr bond continued to rise in September by further 13bp to 8.74%.

Corporate bond spreads and credit indices generally tightened in September after investors’ risk aversion gradually reduced. The trend reversed slightly at month end, however, over the US budgetary concerns.

Click here to read full report: [asset_library_tag 7170,Euro Monthly Commentary – September]

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