Fixed income markets

Contrary to expectations, 2014 saw capital market rates falling from 2% to 0.6% (10-year German Bunds) in reaction to the ECB’s policy and the search for yield. Due to the weak economic growth in 2014 and the ongoing deceleration of inflation, the ECB had to pull out all the stops to prevent deflation. The central bank therefore gradually cut its official interest rate from 0.25% to 0.05%. The ECB also announced a new T-LTRO (targeted longer term refinancing operation) in order to boost bank lending to small and medium-sized companies.

Interest rate levels and returns on fixed income indices

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2013
HY1

2013
HY2

2013
FY

2014
HY1

2014
HY2

2014
FY

 

 

 

 

 

 

 

Source: Bloomberg

3-month euribor, end of period

0.22%

0.29%

0.29%

0.21%

0.08%

0.08%

10-year yields United States, end of period

2.49%

3.03%

3.03%

2.53%

2.17%

2.17%

10-year yields Germany, end of period

1.73%

1.93%

1.93%

1.25%

0.54%

0.54%

 

 

 

 

 

 

 

Return iBoxx sovereign (EUR)

0.1%

2.1%

2.2%

7.0%

5.7%

13.0%

Return iBoxx non-sovereign (EUR)

0.2%

1.9%

2.1%

4.7%

3.3%

8.2%

 

 

 

 

 

 

 

Speculation about a potential ECB purchase program for sovereign bonds as part of a quantitative easing programme (QE) intensified towards the end of the year. This not only caused interest rates to fall but also put pressure on risk premiums for sovereign bonds. These risk premiums fell sharply due to the ECB’s purchasing program for asset backed securities. Risk premiums for sovereign bonds from Southern Europe, except those from Greece, also came down considerably. In Greece, political certainty arose towards the end of the year, causing yields on Greek sovereign bonds to rise sharply. In the run-up to the parliamentary elections, speculation about a Grexit (Greek exit from the eurozone) rose anew on growing odds that Euro-skeptic Syriza would become the largest party.

Risk premiums for corporate bonds compressed, especially in the first half of the year. During the latter half of the year risk premiums became more volatile.

The economic situation in the United States improved considerably in 2014. This allowed the Fed to start tapering its asset purchases. Towards the end of the year, however, the US central bank became increasingly cautious in its communication about the timing of its first interest rate hike. During the year, 10-year US Treasury yields fell from 3% to 2.1%, which is a considerably smaller drop than the one witnessed in Europe.

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