ECB negative rates may be counter-productive by encouraging cash hoarding

12th June 2016 by Chris Iggo

The Federal Reserve (Fed) may not hike rates next week but financial conditions are easier today than they were in December at the time of the first move. Unless there is more evidence that the US economy is slowing down, markets will have to price in some increases in rates after June. However, the Fed is going to take it slow and steady and the outlook is not that damaging for bond investors. Indeed, with the benchmark of cash being zero or negative, our view is that bonds are still attractive. If you need yield and are worried about risk, short duration strategies are an attractive way of getting exposure to bond market income. Yes, there are longer term concerns about returns, but in the short term with confidence in the global economy still weak, fixed income can’t be ignored.