I am Ihab Salib, Senior Portfolio Manager and Head of International Fixed Income at Federated Investors.
How has the trade tension between the U.S. and China affected global bond financial markets?
One thing that markets dislike even more than bad news is uncertainty and that's what you have right now. A lot of uncertainty which leads to a lot of volatility. That's number one. Second, you really had a number of places around the globe, Europe for example, which were slowing down even prior to the escalation in the trade war. So that escalating tension is effecting growth in many regions and many countries globally. A secondary effect is what monetary policy shift that's happening in the U.S., as well as around the globe. Many central banks are beginning to lower interest rates and yields are coming down globally.
What have been some of the major drivers behind the U.S. dollar's recent strength? And do you envision this extending further?
Generally speaking, growth differentials has been the main driver for the dollar. This gets reflected in higher interest rates and as you have higher interest rates, it tends to attract more assets. And the U.S. still offers you some of the highest interest rates you can have globally within the developed world. But more recently we think the tension that you had as it relates to trade has been the main driver. So the U.S. dollar is still the reserve currency of the world and whenever you have this level of uncertainty and volatility, assets tend to go to safe harbor and investors tend to wait out the trade war, for example, in the dollar. Having said that, the dollar does appear to be overvalued against a number of different other currencies, but in this environment where you have high uncertainty, valuation or attractive valuation tends to take a back seat to safety.
Views are as of August 29, 2019 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.