It was in response to the financial crisis of 2008 that major central banks across the world cut their short-term interest rates, bringing them close to zero. They also purchased large volumes of bonds in an effort to bolster the economies of their respective countries. Now, a decade on, interest rates in the developed world continue to be significantly below their pre-crisis levels. The problem is that the situation is unlikely to improve in 2019.
Here’s a look at what to expect from the key central banks in the world during 2019 and what this means to investors.
On March 7, 2019, Reuters reported that the ECB had postponed the timing of its rate hike to 2020. “The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary.”
Uncertainties surrounding Brexit and the global trade war are already having their impact on the Eurozone, with economic growth declining and fears of the decline turning into a downturn rising. Amidst all this, it’s not surprising that the ECB expects rates to remain at record lows at least until the end of 2019.
The US Fed also doesn’t intend to raise interest rates for the remainder of 2019, given the slowdown in economic growth in the country. Following a two-day meeting, the Fed unanimously voted to keep the interest rates unchanged at 2.25%-2.5%. This is a change from the earlier Fed expectation of two rate increases through 2019, reported the BBC, on March 20, 2019.
US interest rates had been a cause for concern through 2018 as well, although the Fed did raise the rate in December, despite pressure from President Donald Trump not to do so.
The situation in the UK has been tumultuous through 2018, with the BoE’s outlook being dominated by the impact of Brexit, especially the chaos surrounding the deal negotiations. The central bank announced a sharp cut to its economic outlook for 2019 on March 21, to 1.2%, from the 1.7% forecasted in November 2018, reported The Guardian. At the same time, the BoE left interest rates unchanged at 0.75%, contrary to market expectations of a change.
What this means is that the British central bank now expects the UK to grow at its slowest since the 2008 financial crisis. In fact, with the Brexit deadline almost upon us, investors do not expect another rate increase during 2019, while some are predicting Brexit to be postponed until summer.
The story is the same in Asia as well. Japan’s inflation has continued to be significantly below its target of 2%. This means that the short-term rates are unlikely to change from the current -0.1%, at least in 2019. So, what does this mean for investors?
The yields of sovereign bonds are significantly impacted by monetary policies of the central banks, especially the interest rates. In a low interest rates environment, bond yields drop, driven by increased demand. Basically, the higher demand for bonds will lead to rising prices and declining yields. So, why would an investor put their hard-earned money into a low yielding bond when the same investment can get them much more attractive returns through alternative investments?
So, for 2019, sovereign bonds might not be the best investment option. The same holds true for any other product that is a derivative of the interest rates imposed by the central banks. On the other hand, some of the leading multi-strategy funds have provided stable and even double-digit returns consistently over the past decade. The use of cutting-edge technology has helped fund managers identify opportunities, while minimising risk, which has benefited the fund and, therefore, the investors.