Yields on benchmark 10-year government bonds in major markets finished the first half of the year lower in the US, but higher in Canada and Core Europe. Yields declined over the second quarter before coming under upward pressure at mid-year when several major central banks gave hints of a less dovish policy stance. Yield spreads in the Euro zone periphery widened on political jitters early in the year but narrowed after the French elections. Corporate bond spreads narrowed further over the first half of the year and emerging market debt performed strongly.
Looking ahead over the balance of the year, we expect robust global growth to assuage concerns about low inflation. The sell-off in global bond markets towards the end of June revealed the sensitivity to any hint of central banks reducing policy accommodation and points to some rebuilding of term premiums. We believe global bond valuations remain expensive and view risk as skewed to the upward side of the forwards.
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