Outlook for the economy more and more uncertain

The exceptional fall in interest rates is of course partly due to the status of United States Treasury securities as the ultimate safe haven. Bank of America and ING expect the American ten-year interest rates to drop even below 1%. Several indicators suggest that parts of the government bond market are overbought: they are more expensive than their intrinsic value justifies.

US government paper also benefits from the increased expectation that the US system of central banks, the Federal Reserve, will intervene to mitigate the economic impact of the virus. According to Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed Income at the Global Investment Center of the Private Bank of ABN Amro, the outlook for the economy has become a lot more uncertain. 'The markets are wondering how the recovery will take place and how fully it will be. Falling interest rates are a sign that investors expect lower growth and inflation. That means that the central banks have to take more action to keep the economy going. How effective that intervention will be, is still to be seen.'

The economic slowdown seems to be largely on the supply side due to disruptions in production chains. 'Monetary policy is less effective there,' says Pieterse-Bloem. 'You have to hope for fiscal action, but that is difficult to coordinate internationally. That is also where part of the fear in the market comes from'. For the time being, central banks do not want to commit to any intervention at all. Up until now, the economic consequences have still been manageable but the question is what the future will bring us.