viernes, 1 de agosto de 2014

viernes, agosto 01, 2014

July 30, 2014 8:28 am

Top-rated government bonds defy gravity

A financial trader monitors his computer screens.©Bloomberg
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When you hit rock bottom, the only way is up. One day that might apply to yields on the world’s safest and most liquid government bondsUS Treasuries, UK gilts, German Bunds and Japanese government bonds.

One day – but maybe not yet. Ten-year yields on core government bonds, which move inversely with prices, have edged lower in 2014defying a near-universal start-of-the-year consensus that the only way was up.

German Bund 10-year yields this week hit a record low of just 1.12 per cent. Ten-year US Treasuries yields rose back above 2.5 per cent on Wednesday on strong economic data but were 3 per cent at the start of 2014.



Such historically meagre rates worry some investors. Low yields can already translate into negative real interest rates after taking account of inflation. If prices are in bubble territory, a correction could inflict heavy capital losses on bond portfolios.

Yields have already risen this year on two-year US Treasuries and UK gilts, which track closely expectations about central bank interest rate moves.

Among strategists and analysts, it is hard to sense a bubble about to burst, however. “For there to be a bubble, there has to be irrational behaviour,” says Steven Major, global head of fixed income research at HSBC. “I don’t see people borrowing to buy bonds – and I don’t think values are far from fundamentals.”

Instead, core government bonds offer havens in still-uncertain times Russia’s tensions with the west are escalating – while yields are held in check by ultra-loose central bank monetary policies and a global glut in savings.

Low yields also reflect global economic prospects. From Japan to the eurozone, growth remains weak. While UK gilts in particular may be vulnerable to sudden changes in interest rate expectations, it is arguably too early to claim the US and UK recoveries will be sustained.

“We are unlikely to see US bond yields rise in isolation; we should expect a synchronised move higher once the global economy is fully recovering,” says Zach Pandl, portfolio manager at Columbia Management.

Christopher Iggo at Axa Investment Managers says: “It’s noteworthy that economies have gained traction, but yields have actually fallen. The risk is that economic growth continues quite strongly and there is a shock reassessment of where central bank rates need to be. But we are still a long way from the interest rate trigger being pulled.”

In Germany, Bund yields could be trapped at low levels for a long time; some analysts talk of their “Japan-isation”. Eurozone growth is sluggish and deflation risks remain. If the European Central Bank launchedquantitative easing” through large-scale bond purchases, Bund yields could fall even further.

In Japan, yields have been pinned at very low levels by the Bank of Japan’s buying of about Y7tn ($69bn) of bonds each month, as part of a broad programme to jump-start growth in the world’s third-largest economy.

When the BoJ embarked on its new easing regime in April last year, many thought higher bond yields were inevitable. Either growth would pick up, sending inflation and interest rates higher, or, if the plan did not work, confidence would collapse in Japan’s stretched state finances, forcing up the government’s cost of borrowing.

As it turned out, over the past 12 months, rates have dropped at every point along the curve, from three-month bills to 40-year bonds. Amid this strong JGB market, investors who hesitated to buy seem to be giving up and resuming their transactions,” says Shuichi Ohsaki, strategist at Bank of America Merrill Lynch in Tokyo.

Powerful forces are also keeping a lid on US yields. The Fed’s forward guidance” is that interest rates will remain low for longer than usual during an upswing. “Macro-prudentialregulation would be used instead to control frothy markets. “It may be that I get more bearish at some point, if UK and US economies really are going gangbusters. But we are still some way from this,” says Mr Major at HSBC.

Top-rated government bonds such as US Treasuries also benefit from their role as collateral backstopping derivatives and other investments – and in global currency reserves and sovereign wealth funds.

With US Treasury yields higher than for rival bonds, demand remains firm.When you go around the world and compare core government rates, US Treasuries are very attractive,” says Rick Rieder, chief investment officer of fixed income at BlackRock. “Treasuries are the most active form of collateral in the world,” he adds.

David Ader, strategist at CRT Capital, says: “In order to burst a bubble you need to see people sell and head for the exit . . . The Fed and other central banks are significant holders of US Treasuries and are not going to sell.” That has also prevented yields going up at least so far.


Copyright The Financial Times Limited 2014.

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