Growth Headwinds - Good for Bonds
The global economy is facing a tougher road ahead, with the Organisation for Economic Co-operation and Development (OECD) painting a more cautious picture for growth. The OECD recently cut its global GDP growth forecast to 2.9% for both 2025 and 2026, down from earlier estimates. This slowdown is expected to hit the US, Canada, Mexico, and China particularly hard.
Why the gloomier outlook? The OECD points to several key issues: rising trade barriers, which are stifling international commerce; tighter financial conditions, making borrowing more expensive; and heightened policy uncertainty, driven by unpredictable geopolitical shifts. While inflation has been cooling, the OECD warns that increased trade costs could reignite price pressures, urging central banks to stay alert and governments to push through reforms for long-term economic health.
This cautious stance from the OECD creates a potentially favourable environment for fixed income and bond investing.
Firstly, a slowdown in global growth typically leads to lower inflation. As economic activity cools, demand for goods and services softens, which helps to keep prices in check. This is good news for bonds because it means the real value of their interest payments and principal remains stable.
Secondly, the "tighter financial conditions" mentioned by the OECD suggest that bond yields are at attractive levels. Investors can lock in these higher returns, providing a steady income stream even if the economy struggles.
What is more, when uncertainty is high, investors often flock to safer assets. Government bonds, especially those from financially stable countries, as identified by our proprietary Net Foreign Assets (NFA) Model, are seen as safe havens during times of economic worry. This increased demand can push bond prices higher, offering the potential for capital gains on top of the regular income.
Finally, should economic deceleration compel central banks to pause or ease rates, bond markets would likely benefit from falling yield expectations, driving bond prices higher.
In essence, a global economy facing slower growth, persistent uncertainty, and the possibility of central banks easing up on rates creates a compelling case for investing in fixed income, offering both attractive income and the chance for your investment to grow.
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