There’s a funny trend in the global markets that we haven’t seen for many years.
It’s the divergence between what’s going on at the Federal Reserve, as it prepares to raise interest rates for the first time in nearly a decade — and what everyone else around the world is doing.
“One of the biggest, most interesting things to us right now is how different the Fed is from most other developed market central banks,” Raman Srivastava, Standish Mellon Asset Management’s codeputy chief investment officer and managing director of global fixed income, told Business Insider.
Standish Mellon is a fixed income investment management boutique and subsidiary of BNY Mellon.
The European Central Bank is in the midst of an asset buying program much like the Fed’s own quantitative easing policy in the aftermath of the financial crisis. The ECB has been buying up €60 billion worth of bonds every month since January.
The Bank of Japan, the Bank of Sweden, the Reserve Bank of Australia, and most other developed-market central banks, with the exception of the UK, are also pursuing easy money policies.
Heading in different directions
Srivastava expects that when the European Central Bank meets in early December, it will double down on its quantitative easing policy, choosing either to buy more bonds or to extend the program for longer.
And it could happen mere weeks before the Fed raises interest rates in the US.
“That has not been the case for a long, long time — where you’ve had this amount of divergence,” Srivastava said. “Usually policy is all moving in the same direction at different degrees.”
There’s a whole host of implications that come with it.
The low-interest rate environment since the global financial crisis has been good for bond investors in the US. That’s led to worries about what will happen when that environment changes.
As Europe continues to ease, we may see similar results there.
“It’s supportive for European government bond markets,” Srivastava said. “Not to mention the fact that inflation is low, growth is low, and they’re ageing, demographically.”
The divergence in central bank policy is relevant, Srivastava says, because “those same tailwinds that have supported the US fixed income market are there in a lot of other parts of the world.”
So bond investors, take heart. Things may be changing in the US, but there are a lot of other places abroad where the benefits to fixed income still exist.
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