Seoul, Seoul -- (SBWIRE) -- 10/21/2010 -- The major government bond markets have made further significant gains over the past month, despite the massive fiscal deficits around the world, and the renewed concerns about the possibility of sovereign debt defaults in Europe.
They have continued to receive support from the slow pace of economic recovery in the developed world, and the low level of short-term interest rates; but they have also acquired an enhanced “safe haven” status and as a result 10-year yields have fallen to 2.5% in the US, 2.2% in Germany, below 3% in the UK, and below1% in Japan.
Strathclyde Associates Korea article: This continuing fall in yield levels has surprised most commentators, and has led on the one hand to suggestions that these markets are anticipating a move towards a Japanese-type situation of an extended period of slow growth and the threat of deflation, and on the other hand to warnings that a “bond bubble” is being created that will quickly burst if the gloom about global economic prospects proves to be overdone.
The outlook for the markets has also been complicated by the further evidence of conflicting attitudes amongst central bankers about the correct response to the current problems, with the Fed primarily concerned to maintain the momentum of the US economy, and the European Central bank, and to a lesser extent also the Bank of England, anxious to reduce the level of fiscal deficits.
Market Outlook October 2010: Strathclyde Associates Government Bonds Part1Although we have also been surprised by the strength of the markets so far, our position remains basically unchanged. Slow economic growth and low short term interest rates will continue to provide support to the markets we do not expect a move to a “doubledip” recession in the developed countries, and we do expect China and other developing countries to continue to provide considerable support to the global economy.
We therefore feel that the gloom about economic prospects is overdone, and that sentiment will eventually change.
In the meantime the markets have to cope with massive fiscal deficits and the possibility of sovereign debt defaults in Europe. There us therefore a serious risk that a “bond bubble” is developing.
The latest available evidence on the performance of the US economy has obviously provided considerable support for the US bond market, and for bond markets elsewhere.
Market Outlook October 2010: Strathclyde Associates Government Bonds Part1Consumer spending is holding up fairly well, helped by considerable discounting by retailers; but the labour market and the housing markets remain depressed, manufacturing activity appears to be declining, and the latest trade statistics do not suggest that exports will offset any weakness in domestic demand.
Growth in the second half of the year is therefore expected to be well below the level achieved in the first six months.
There was therefore considerable speculation ahead of the latest meeting of the Fed’s Open Market Committee that further quantitative easing measures would be introduced to boost the economy; but although the bank conceded that “the pace of the recovery in output and employment has slowed in recent months”, its only response has been to reinvest the proceeds of maturing mortgage-backed and agency securities into Treasury securities to ensure that it did not tighten its easy monetary policy.