Date: Mon, 3 February 2020
Author: Tommy Stubbington
Sweeping through bonds markets earlier this month was a rally that left investors who had bet on higher yields confounded with the expansion of the global tally of negative-yielding debt to more than $13 trillion.
Alarmed over the outbreak of the coronavirus in China, investors are impelled to discard risky assets. An estimate of $1.4 trillion was wiped off the value of global stocks since mid-January and in its place, investors have turned to the safest government debt.
The U.S. 10-year bond yield impacted a three-month low of 1.57 percent on Tuesday, echoing an increase in prices. German 10-year yields have hit their lowest since October at minus 0.4 percent. Japanese yields also dropped this year.
The moment there was evidence that not everything was so optimistic, people easily gave up on those trades in the blink of an eye.
The acceleration into government debt interrupts a global sell-off that started in the autumn after an upturn in the global economy and there was a perception that central banks had ran out of stimulus options driving an exodus from very low-yielding debt. Many fund managers whom predicted the selling to extend into 2020 have been identified amidst of growing worries regarding the impact of the virus on China’s economy.
“The bottoming out of global growth was supposed to unleash this reflationary wave that would see bonds sell off,” says Nick Wall, a fund manager at Merian Global Investors. “But as soon as there was evidence that not everything was so optimistic, people gave up on those trades very quickly. A lot of people have closed out their positions.
The debt rally underscores the enduring appeal of bonds as a counterweight that gains when riskier investments decline. “U.S. Treasuries are one of the best insurance policies you can have in your portfolio,” says Andrea Iannelli, investment director at Fidelity International. “Whenever things get messy, that’s what you want to own.”
Iannelli adds, the asset manager prefers U.S. government bonds as the Federal Reserve having the liberty to cut interest rates should weaken China resulting a spill over into a broader global slowdown.
Globally, bond markets stayed short of the extreme levels hit in August and September last year during the period $17 trillion of bonds carried a sub-zero yield. Even so, that sub-zero total has expanded by more than $2 trillion since mid-January.
The scale and speed of the bond rally has pushed yields back to levels that indicate a depressing vision for our global economy. It left even some bond bulls wary.
Shifts in the Treasury market indicates that the U.S. yield curve is close to inverting. In other words, longer-term yields fall below short-term yields as it did for much of last year. Previously, such an inversion has been a pointer that a recession is on the way. While most investors trust this year will bear modesty if not for unimpressive progression.
“Generally, whenever we have seen a big government bond sell-off I have been a buyer,” says Mike Riddell, a fixed income portfolio manager at Allianz Global Investors.
“But we are a bit bearish [on bonds] at these levels,” he continues. “Given the direction of global data, the rally looks a bit overdone. You can rationalize it by saying that because of coronavirus the growth outlook is far worse, but I’m not sure that’s what the market really thinks.”
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