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Play Global Bond ETFs to Join Central Banks' Rate Cut Euphoria

Sanghamitra Saha

Amid global growth concerns sparked by unceasing trade tensions and China’s yuan devaluation, aggressive rate cuts among global central banks have been rife. Recently, central banks in New Zealand, India, Thailand, South Korea, Indonesia and South Africa resorted to rate cuts in order to keep signs of a slowdown at bay. Low exports amid trade tensions were bothering Asian exporters while countries like India and New Zealand sought to speed up growth (read: After Yuan Devaluation, Likely Chinese Retaliation & ETF Ways).

Inside the Series of Rate Cut Announcements

On Aug 7, New Zealand's central bank surprised markets by cutting the official cash rate (OCR) by a bigger-than-expected 50 basis points to a record-low 1.00%. Before this, New Zealand’s central bank slashed interest rates to a fresh record low in early May. It became the first developed economy to ease policy this cycle, per Bloomberg. RBNZ's forecasts indicate possibility of another rate cut by the end of the year.

The Reserve Bank of India lowered its policy rate on Aug 7 for the fourth time this year as benign inflation gave the central bank reasons for easing the monetary policy and boost the economy which is seeing the slowest expansion in nearly five years. In the latest cut, repo rate was lowered by 35% basis points to 5.4%. The cut was steeper than expected as about 80% of the 66 economists surveyed by Reuters expected the RBI to cut its benchmark repo rate by 25 bps while three forecast a 50-bp cut.

On Aug 7 again, Thailand’s central bank startled global markets with its key rate being cut by 25 basis points to 1.5%. Only two of the 29 economists in a Bloomberg survey had predicted the move.

At July-end, the Fed put the first rate cut since 2008 into effect at its July meeting. The Fed lowered the benchmark interest rates by a modest 25 bps to 2.00-2.25%.  The Euro zone indicated on Jul 25 that it could resort to new stimulus measures to boost its ailing economy as soon as in the September meeting. The stimulus moves could include further rate cuts and other expansionary measures (read: ECB May Cut Rates in September: ETFs in Focus).

On Jul 18, the Bank of Korea (BOK) cut the seven-day repurchase rate to 1.5% from 1.75%, marking their first rate cut since 2016. The move was forecast by only 10 of 25 analysts surveyed by Bloomberg. The BOK now expects the economy to expand 2.2% this year versus 2.5% in April. Inflation is projected to tick up to 0.7% versus the prior projection of 1.1%. The central bank signaled at more rate cuts.

On the same day, Bank Indonesia reduced its key interest rate by 25 bps to 5.75%. Lending and deposit facility rates were also cut by 25 bps to 6.5% and 5%, respectively. The move signaled an end to the tightening cycle that started last year (read: Indonesia Banks on Back-to-Back Rate Hikes: ETFs in Focus).

On Jul 18, South African Reserve Bank (SARB) also slashed interest rates for the first time since March 2018 by 25 bps to 6.5%, as expected. Inflation expectations continued to moderate for the economy.

The central bank of Philippines cut its key overnight reverse repurchase facility rate by 25 bps to 4.5% on its May 5, 2019 meeting. It was the first rate cut since May 2016, reversing a 175-bp rate hike last year. 

In May, China’s central bank announced a cut in reserve requirement ratios (RRRs) to release about 280 billion yuan ($41 billion) for some small and medium-sized banks. The PBOC had set three dates — May 15, Jun 17 and Jul 15 — for the implementation of a cut in RRR.

Bond Yields in Downward Trajectory

U.S. benchmark-treasury yield dived to 1.71% on Aug 7 from 2.66% at the start of the year. Germany’s benchmark 10-year government bond yield dropped to a negative 0.60% on Aug 7, below bank forecasts. Switzerland’s key interest rate is at -0.75% and its 10-year bond yield is around a negative 0.96%, per Reuters.

HSBC lately cut its forecasts for German yields to reflect soft inflation and central bank easing. It now expects German 10-year yields to fall to negative 0.8% from a previous forecast of negative 0.2%. About $15 trillion of global government bonds now trade at negative yields, according to Deutsche Bank.

Global Bond ETFs Best Bets Right Now

Some of the top-performing international bond ETFs in the past month were iShares International Treasury Bond ETF IGOV, iShares Core International Aggregate Bond ETF IAGG, SPDR Barclays International Treasury Bond BWX, Vanguard Total International Bond Index Fund ETF Shares BNDX, SPDR Barclays Capital International Corporate Bond ETF IBND and Vanguard Total World Bond ETF BNDW (see all Government Bond ETFs here).

The overall easing scenario is likely to favor U.S. bond market as well. Some U.S. bond ETFs that have been around a 52-week high are 15+ Year US TIPS Index ETF Pimco LTPZ, PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund ZROZ and First Trust Managed Municipal ETF FMB (read: Treasury ETFs Rally to New Highs on New Tariff Threats).

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iShares Core International Aggregate Bond ETF (IAGG): ETF Research Reports
 
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ): ETF Research Reports
 
SPDR Bloomberg Barclays International Treasury Bond ETF (BWX): ETF Research Reports
 
PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ): ETF Research Reports
 
iShares International Treasury Bond ETF (IGOV): ETF Research Reports
 
Vanguard Total World Bond ETF (BNDW): ETF Research Reports
 
Vanguard Total International Bond ETF (BNDX): ETF Research Reports
 
First Trust Managed Municipal ETF (FMB): ETF Research Reports
 
SPDR Bloomberg Barclays International Corporate Bond ETF (IBND): ETF Research Reports
 
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