Government Bonds
Although the ECB cut rates early in the month for the first time in this cycle, and ahead of the Federal Reserve, it had little impact on bond markets having been widely signalled ahead of time. More importantly, however, was US economic data as markets look for increased certainty about the timing of the first rates cuts in the US. A strong employment report early in the month caused the bond market rally to stall and yields to rise. This was followed a few days later by an inflation print that was below market expectations, driving yields lower once more, even though the Fed pushed back their expectation for rates cuts this year in their updated Summary of Economic Projections.
But, from the middle of the month, it was political risk that took centre stage. While UK general election campaigning continued, with polls strongly indicating the Conservative party will be voted out of power in favour of a new Labour government in early July, the main shock came from France. After his party performed poorly in the EU parliamentary elections, President Macron dissolved parliament and called for legislative elections in France. Concerns that the right-wing National Rally would receive a much higher share of the vote caused spreads on French government bonds over their German counterparts to widen, and impacted peripheral eurozone government debt.
Meanwhile, in the US, the first presidential debate between Biden and Trump raised some concerns around whether Biden will be the Democrat candidate in November. This heightened uncertainty, along with lack of imminent easing of monetary policy, caused government bonds to give back some of their earlier gains into month end.