What’s driving the bond rally?

Alex Stanley takes a closer look at the drivers of the recent bond rally.

Key points for this note:

  • Bond yields hit five-month lows in July, reversing much of the Q1 sell-off and confounding consensus.
  • Lower yields partly reflect concerns over a rise in global Covid case numbers.
  • There are, however, many other factors at play, including positioning technicals, a sense of data “peaking” in large economies and a perception that central banks will cap upside inflation risks.
  • Long term forward rates at current low levels imply a pessimistic outlook for growth or a view that structural headwinds have significantly lowered the neutral policy rate.
  • Market narratives can change quickly – the path for growth, inflation and QE tapering over coming months can challenge current low rate pricing.

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