Global investors have refrained from investing in Europe for some time now. Over the past three years, a gap of almost 30% has opened up between the European market and the US.
Equities and bonds strengthened worldwide, but the dollar weakened because of the Fed’s more dovish tone on future rate rises. Whilst now at 1%, there is the suggestion another two rate rises will happen in 2017, this is still below some of the market’s more fearful projections.
In aggregate, the bond asset class remains expensive. Government bond yields are too low to tempt a meaningful increase in duration exposure, credit spreads are so tight that it is difficult adding credit risk especially when most fixed income investors are already overweight credit relative to rates.
The markets were widely anticipating the US Federal Reserve (Fed) would raise interest rates at its March policy meeting, and the Fed delivered, increasing its key short-term lending rate—the Federal funds rate—for the second time in three months. The Fed also indicated it hasn’t likely finished its tightening cycle yet, but there are still plenty of unknowns ahead.