Follow Joshua McCallum
Joshua McCallum is the senior Fixed Income Economist at UBS Global Asset Management, where he provides economic analysis to support and challenge portfolio managers. Before joining UBS in 2005, Joshua worked for the UK Treasury, dealing with an eclectic range of topics including international macroeconomics, the UK budget, economic reform in Europe, and post-conflict fiscal policy in Iraq.
Many investors are currently holding negative yielding Eurozone sovereign bonds. Why not sell these and buy positive yielding US treasuries or UK gilts? Foreign bonds come with exchange rate risk and also interest rate risk. These can be hedged, but particularly for interest rate risk, it is costly. However, once US interest rates start to rise, some of the interest rate risk will be realised and the position could change.
It often seems to be forgotten that one person’s import is another person’s export, and total exports globally must be equal to total imports. When talking about US growth and its impact on the rest of the world, slowing US GDP growth is not necessarily a bad thing – if domestic demand is growing faster than GDP, then the country is contributing demand to the rest of the world.
Developed market and emerging market rates followed a similar pattern after the financial crisis, but since 2011 have diverged. The Fed is considering when to hike, but twenty other central banks have eased policy since the start of the year. Other central banks are picking up where the Fed and Bank of England left off. This global reflation is exacerbating the Great Divergence, as demonstrated by the appreciation of the USD and GBP.
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