Almost a year after the tide turned on an unbroken three-decade decline in world bond yields, stubbornly low wage growth and inflation and central bank hesitancy suggest any rise in ultra-low borrowing costs will be far slower than many had feared.
Yields in Europe, Japan and the United States are all up from record lows hit a year ago as fears of deflation ebb and the global economic expansion goes up a gear. The euro zone, for example, is recording its best growth rates in a decade.
But a lack of sustained consumer, wage or commodity price pressures mean there is no urgency for much tighter monetary policy over the longer term, even though the U.S. Federal Reserve last week lifted rates for the second time in 2017.
And that puts long-term debt markets back on a more comfortable footing, even if the super-low yields of this time last year are behind us for good.
“We have seen the end of the secular bond market bull run, but that doesn’t necessarily mean that you transition straight into a secular bear market,” said Mark Dowding, a portfolio manager at BlueBay Asset Management.
U.S. 10-year yields have retraced almost all of the sharp rise that followed President Donald Trump’s election last November on promises of higher spending seen as likely to boost growth and inflation in the world’s biggest economy.
In Europe, German equivalents are around 50 basis points above a low hit in early July 2016, but have traded in a tight 30-40 bps range all year.
One of the reasons is the constant demand for bonds from pension and insurance funds, who favor fixed income investments to better match liabilities and to ‘de-risk’ portfolios as aging workers move toward retirement.
Data compiled by JP Morgan shows that bonds have made up 45-50 per cent of the assets of G4 -- euro zone, Britain, Japan and U.S. -- pension funds and insurance companies for the last eight years, proving relatively insensitive to price changes.
Combined with central bank holdings, this ‘sticky money’ makes up at least 50 per cent of investment into bonds globally, private estimates suggest.
And even some of the more speculative funds polled by Reuters have shown no sign of giving up on what has historically been seen as a reliable store of wealth.
Those polls show global investors -- including asset managers and private wealth funds -- have kept their allocations to fixed income fairly steady between 39 and 41 percent over the past year.
The last few months appear to have given bond investors comfort that even if yields trend higher over the next few years, the final destination is less dismaying than it once seemed and it may take longer to get there.
A tell-tale sign of this in markets has been a flattening of yield curves. That is when rising short-term rates are coupled with falling long-term equivalents.
Comparing the current path of monetary tightening in the United States to previous cycles explains why investors may have come to this conclusion.
When the Fed last embarked on successive rate hikes over a decade ago, it took two years to raise rates from 1 percent to over 5 percent, with hikes at 17 consecutive meetings.
In the current cycle, it has taken 18 months for 1 percentage point of an increase.
Policymakers project rates will top out at around 3 per cent by late 2019 or early 2020. Yet money markets are pricing rates no higher than 2 percent in that time.
Investors have also seen other major central banks turn more cautious -- with the possible exception of the Bank of England, which is battling Brexit-induced inflation pressures.
The European Central Bank cut its inflation forecast this month and said it had not discussed scaling back its monetary stimulus, dampening talk that stronger growth and easing political risks could pave the way for policy tightening.
The Bank of Japan last week ruled out an early exit from its stimulus scheme.
“There are plenty of reasons why with the current growth/inflation path and structural pressures, yields will remain pretty subdued for some time,” said Charles Diebel, head of rates at Aviva Investors.
“This does not mean that higher yields will not come, but more that the transition away from emergency measures is a slow and grinding process.”Report Typo/Error