Markets across the globe will be focused on the European Central Bank (ECB), Bank of Japan (BOJ) and the Federal Reserve (Fed) this week. With sluggish global growth and negative interest rates on the top of economist's minds, this week's announcements will be closely scrutinized.
Last week we saw U.S. interest rates rise modestly. I continue to believe it will be a challenging few months for bond prices. The level of risk for fixed income assets has never been higher. The average duration of global bonds increased to a new high of greater than 6.8 years. To put the risk of bonds in perspective, if global interest rates rise by just 50 basis points, global investors will lose approximately $1.6 trillion. The challenge with long maturity fixed income investments is that it doesn't take much of an increase in interest rates to cause price declines that can wipe out all of the interest earned for a year.
Pay close attention to the commentary from central banks (especially the BOJ) to see if they provide any more insight into the potential for additional negative interest rates. These types of policies may have a reverse impact of pushing up longer term rates. On Wednesday, the Fed should provide some additional insight into the potential for a June increase in rates.
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