Bloomberg News

All Bonds Rally First Time Since 2008 With Portugal Up

November 05, 2012

European Central Bank President Mario Draghi

Mario Draghi, president of the European Central Bank, said the bank is ready to start buying government bonds to help the debt-ridden nations in the region, including Spain. Photographer: Tomohiro Ohsumi/Bloomberg

From the U.S. to Germany and even Japan, where the bond market is twice the size of the economy, investors can’t get enough government securities even though rising debt loads are blamed for curbing global growth.

For the first time since the financial crisis in 2008, all 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies are poised to generate positive returns on an annual basis. Gains this year range from Portugal’s 47 percent to Japan’s 1.78 percent.

After years of spending to bolster their economies, governments are getting a handle on their borrowing at the same time central banks are taking new steps to cap bond yields and inflation slows. The par amount of debt tracked by Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index has risen 7.3 percent this year to $23.6 trillion, the smallest increase since 2005, when it fell 3.7 percent.

“The longer-term bull market in government bonds is still intact all over the world,” Howard Simons, a Bianco Research LLC strategist in Chicago, said in a Nov. 2 telephone interview.

Government bonds have returned 31 percent since mid-2007, with reinvested interest based on the Bank of America Merrill Lynch index, while the MSCI All-Country World Index (MXWD) of stocks has lost 4.2 percent with dividends. The Standard & Poor’s GSCI Total Return Index of 24 raw materials has dropped 21 percent.

‘Deflationary Force’

Even though stocks have gained 13 percent this year, debt investors have been willing to accept lower interest rates to hold government debt because of slower inflation in the face of unprecedented central bank stimulus. The average bond yield has dropped to 1.44 percent from 1.76 percent on Dec. 31, the Bank of America Merrill Lynch indexes show.

“We still have a massive deflationary force,” said Michael Quach, the global investment analyst for Smith & Williamson Investment Management Ltd. in London, which oversees the equivalent of $19.4 billion. “You also have very low interest-rate policies in most developed nations.”

Morgan Stanley economists led by Joachim Fels in London wrote in an Oct. 31 report they see global consumer prices rising 3.4 percent this year, down from 4.4 percent in 2011. They predict an even smaller increase of 3.2 percent next year.

In the world’s biggest economy, inflation as measured by the U.S. personal consumption expenditures index, a gauge preferred by Federal Reserve, rose 1.3 percent in the third- quarter from a year earlier, below the 1.9 percent average of the past 20 years, data from the Commerce Department shows.

Rally Missed

Wage growth is slowing, with a report from the Labor Department on Nov. 2 showing average hourly earnings for America’s workers climbed 1.6 percent in October from a year earlier, the smallest gain since records began in 2007.

Ten-year Treasury yields fell three basis points, or 0.03 percentage point, last week to 1.72 percent, and are down from 1.88 percent at the end of 2011, according to Bloomberg Bond Trader prices. The yield fell four basis points to 1.68 percent at 11:53 a.m. in New York.

Few investors or strategists foresaw the rally. Ten-year yields were expected to be higher this year for at least two- thirds of the Group of Seven nations plus Brazil, Russia, India and China, according to data compiled by Bloomberg.

Rather than a referendum, on government actions, gains in government securities are more of a reflection of central banks supporting government debt, according to Jamie Stuttard, the London-based head of international bonds at Fidelity Investments, which oversees $1.58 trillion.

Benchmark Rates

Benchmark interest rates are close to zero in the U.S. and Japan and are a record low 0.75 percent in Europe.

After buying $2.3 trillion of Treasuries and mortgage- related bonds, the Fed said Oct. 24 it would continue its unprecedented stimulus measures by purchasing $40 billion of home-loan securities a month until the labor market improves “substantially.”

While payrolls expanded by 171,000 in October following a 148,000 gain in September, a U.S. Labor Department showed Nov. 2 that the unemployment rate rose to 7.9 percent from 7.8 percent.

The Bank of Japan increased its asset-purchase fund on Oct. 30 by 11 trillion yen ($137 billion) to 66 trillion yen. European Central Bank President Mario Draghi said Oct. 4 the bank is ready to start buying government bonds to help the debt- ridden nations in the region, including Spain.

Spain, Italy

“The only reason these bonds rallied is because of external factors such as liquidity from central banks and a proactive response that Draghi has taken,” Fidelity’s Stuttard said by telephone Oct. 30. “Without that, there would have been a Spanish government bond crisis in the third quarter.”

Spanish 10-year bond yielded 5.75 percent today, down from a euro-era record 7.75 percent on July 27. Ten-year Italian yields dropped to 5 percent from 6.71 percent on July 25.

The decline in yields has helped Spain’s government debt return 3.4 percent, while Italy has gained 17.1 percent. The 17- nation euro-area has risen 9.2 percent on average, according to the Bloomberg/EFFAS indexes.

“The monetary authorities are going to do whatever it takes to stop any sharp rise in bond yields while they remain concerned about the growth outlook,” said Steven Miller, a Sydney-based investor at BlackRock Inc., which oversees $3.7 trillion as the world’s biggest money manager. “Central banks are buying a lot of government debt and if they keep on buying it, that is going to curtail any tendency for yields to rise.”

Lowered Forecasts

The International Monetary Fund lowered its global growth forecast last month to the slowest pace since the 2009 recession. The economy will grow 3.3 percent this year and 3.6 percent next year, the IMF said on Oct. 9. That compares with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013.

Investors are better off sticking with U.S. Treasuries, according to Gary Shilling, president of A. Gary Shilling & Co., an economic forecasting company in Springfield, New Jersey.

“There’s no raging economic growth to justify what we’re seeing” in equities markets, Shilling said Oct. 18 on Bloomberg Radio’s “Taking Stock” with Pimm Fox and Courtney Donohoe. “This is really an opiate, all this stimulus.”

Developed economies with high public debt potentially face “massive” losses of output lasting more than a decade, even if their interest rates remain low, Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff wrote in a paper published in April on the National Bureau of Economic Research’s website.

Debt Loads

They found that countries with debts exceeding 90 percent of the economy historically have experienced subpar growth for more than 20 years. Even with those dangers, the economists said they weren’t advocating rapid reductions in government debt at times of “extremely weak growth and high unemployment.”

Japan’s debt of $11.5 trillion is the largest in the world and more than double the nation’s annual gross domestic product, according to data compiled by Bloomberg. The U.S.’s $11 trillion is equivalent to 68 percent of GDP. Greece, Iceland, Italy, Singapore, Portugal and Ireland all have debt that exceeds the size of their economies, the data show.

After Portugal, the next best-performing government bond market is Ireland, with its debt returning 28 percent, followed by Hungary at 18 percent.

Japan, the worst-performing market, is followed by Sweden at 1.85 percent and Switzerland at 1.91 percent. U.S. bonds are up 1.92 percent.

Auction Demand

Efforts by governments to curb spending mean that this year’s 7.3 percent growth in debt outstanding, as measured by Bank of America’s Global Sovereign Broad Market Plus Index, compares with 10 percent last year, 18 percent in 2010 and 25 percent in 2009.

Some governments are finding it easier to sell bonds. Investors bid a record $3.17 for each dollar of the $1.79 trillion in notes and bonds sold by the U.S. Treasury this year, compared with $3.04 in 2011 and $2.99 in 2010, according to data compiled by Bloomberg.

Portugal, shut out of bond markets for more than a year as it relies on aid to stay solvent, is considering a private placement after visiting investors, Joao Moreira Rato, chairman of the nation’s Lisbon-based debt agency told Bloomberg News last month.

Demand will persist for sovereign debt, Jeffrey Caughron, an associate partner at Baker Group LP in Oklahoma City, which advises community banks on investments exceeding $42 billion, said in a Nov. 1 telephone interview.

“There’s still room for the healthy countries and those enacting responsible policies to continue to issue any debt.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net; Paul Dobson at pdobson2@bloomberg.net


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