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Bond yields reflect borrowing costs for the governments who issue them, but can have an effect on mortgage rates, investment returns, the wider economy and personal borrowing.
Certain markets have their own domestic issues at play. An uptick in unemployment in the U.K., political instability in France, and the ongoing U.S. government shutdown are also influencing investors in those respective markets, for example.
However, market watchers told CNBC that Tuesday’s rally in sovereign bonds was largely due to a broad move into safer assets. Alongside bonds, gold, the Japanese yen and the Swiss franc — all typically regarded as safe haven assets in times of uncertainty or volatility — moved higher.
Investors are seeking options to ride out fresh tariffs-induced volatility, according to Marc Ostwald, chief economist and global strategist at London’s ADM Investor Services.
“The move lower in [developed markets] yields is broad based, and a function of flight to safety due to rising volatility in risk assets, even if a lot of this is very knee-jerk, and as we saw yesterday can turn on sixpence into renewed risk appetite,” he said in an email.
Monday saw a brief reprieve for equities following Friday’s selloff, with Wall Street’s major averages clawing back some of the previous session’s losses, while European stocks also notched gains.
“It is all tied to the now typical ambiguous and posturing headlines and measures from the U.S. and China in respect of trade relations and negotiations, and unlikely to dissipate in the near term,” Ostwald added on Tuesday.
“Longer term concerns about political instability … and headwinds from the high level of government debt, which no DM government is doing anything to address, will tend to temper gains, [but] this week’s speeches at the IMF/World Bank … which may offer hints on relaxing bank capital rules with regards to purchases of [U.S. Treasurys] could also give bonds something of a tailwind,” he said in reference to the IMF and the World Bank’s Annual Meetings taking place in Washington, D.C., this week.
Broader risk appetite
Russ Mould, investment director at AJ Bell, agreed that the bond markets could be responding to a shift in overall sentiment.
“Western sovereign bond yields are moving lower, and thus prices are moving higher. This may be the result of an easing in risk appetite – Asian and European headline equity indices are generally down today, thanks to ongoing worries over U.S.-China trade relations,” he told CNBC via email on Tuesday.
Mould also pointed to broader concerns over the economy and key industries, with the high profile collapse of First Brands raising concerns and sending jitters through markets.
“[These are] worries which will not ease in the context of a profit warning from another company which supplies the car industry, namely France’s Michelin,” he said. “Yield curves are flattening a touch, too, again to perhaps reflect concerns over economic softness and to price in further interest rate cuts from central banks.”
Tim Hynes, head of credit research at Debtwire, also told CNBC on Tuesday that bonds were rallying due to concerns about the possible reignition of a Sino-U.S. trade war, attributing the market moves to “trade tension and growth fears.”
“The renewed U.S.–China trade escalation is tilting sentiment toward risk-off,” he said. “Investors, fearing weaker demand, are piling into government bonds.”
