It is sometimes said that bond managers get paid to worry. If that’s true, they are earning their money.
As has often been the case over the past two years, bond prices and bond strategists are pointing to fears that stocks aren’t acknowledging. That’s saying something, given that stocks have not exactly been soaring so far in 2010.
Bonds market watchers are exhibiting an increasingly severe case of nerves about the ability of the world economy to continue its rebound in the absence of stimulus. At the same time, the bond market is balking at funding any more stimulus for many countries, and the hope of growing out of debt for the countries with the worst balance sheets is getting fainter. Stocks, meanwhile, while not roaring ahead, are holding on to last year’s huge gains.
All this comes as the Group of 20 leaders prepare to meet in Toronto at week’s end to try again to hash out just how and when to withdraw stimulus. Many investors are already headed out for the summer, and bored with such summitry in any case. But this bears watching.
It’s a tough balance for the politicians to strike. U.S. President Barack Obama wants to stick it out with more stimulus; European politicians would probably love to oblige, but don’t have the money. Canada’s position is that advanced countries need to start agreeing to “credible plans” to cut deficits.
The stakes are high, not only for stock investors who are hoping for another year of solid returns, but also for a world economy that some analysts say may not be able to limp along without more government aid.
“The music’s going to stop with the removal of stimulus,” argues Simon Ballard, chief credit strategist at Royal Bank of Canada’s securities unit.
Mr. Ballard believes that “equity geeks,” as he likes to call them, “are still smoking something when they talk about the outlook for equities,” which is predicated on continued strong economic growth starting at last to drive a big pickup in revenue growth.
