Key takeaways from the week

  • Following two weeks of gains, the S&P 500 fell by 1.27% this week, with the bulk of the losses coming on Thursday and Friday. Prior to the late-week sell-off, stocks were modestly higher in reaction to an accommodative statement by the Federal Reserve, which indicated that the domestic economy is not yet ready for an additional short-term interest rate hike;
  • US GDP was lower than expected, disappointing markets. The report showed a growth of 0.5% in the first quarter indicating a sluggish domestic economy; and
  • The price of oil continues to the upside with another 5%+ movement along with gold hitting the highest it’s been in 18 months. This is off the back of continued dollar weakness.

Trillions and trillions worth of currency has been printed by central banks since the Financial Crisis of 2008. Interest rates are at an all time low and still seem to be falling into negative territory. This has pushed government bond prices up to record, some say 'bubble-like' levels. 

If the price of bonds is inversely correlated to interest rates, then surely it's obvious what will happen over the coming years, as inevitably, interest rates can only rise?

Not quite.

So what should you do if you're wanting to invest in bonds?

Not surprisingly, the industry merry-go-round can't agree on what will happen.

The performance of the bonds that you hold is also driven by the length of their maturity and their credit quality. Bonds that mature farther in the future are at a greater risk of unexpected changes in interest rates. Bonds with lower credit quality are at greater risk of default. Therefore, extending bond maturities and reducing credit quality increases the risk, and potential returns, with the opposite effect for short-dated, high quality bonds.

If you then factor in negative interest rates, priced-in anticipation of slow gradual rate rises and continuing quantitative easing, the picture becomes cloudy.

Do you understand what type of bond exposure you need?

If not, you could end up increasing the risk in your portfolio, which is unlikely to have been the intention. Before taking the plunge, make sure you do your research, and speak to professionals who can help you understand what you need and how to access it.

Market data

Equity Indices Value Weekly Change
FTSE 100 6241.89 -1.09%
S&P 500 2065.30 -1.26%
Hang Seng 21067.05 -1.86%
Shanghai Composite Index  2938.32 -0.71%
Nikkei 225 16147.38 -8.11%
Dax 30  10038.97 -3.22%
Bonds  Value Weekly Change
US 10 yr 1.82% -3.30%
UK 10 yr 1.59% -0.63%
Commodities / Energy Price Weekly Change
Gold $1,299.51 4.41%
Brent Crude Oil $46.8 2.71%
Currencies Majors Value Weekly Change 
EUR-USD 1.1489 2.15%
USD-JPY 106.4 -4.69%
GBP-USD 1.4615 1.61%
Central Bank  Rate
Fed Reserve 0.50%
ECB 0.00%
Bank of England 0.50%
Bank of Japan -0.10%
Prices as at Friday 29 April 2016

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