How low can bond yields go? Every day seems to provide fresh evidence that we really don’t know. But whatever your answer, between the gravitational pull of central bank debt purchases and a slowing global economy, the reality is: probably lower.
Milestones include unprecedented 10-year yields in Germany, Japan and the U.K. British government debt has returned 8.1% this year and the spread between 10-year gilts and comparable Treasuries is at the widest since 2006 on concern the U.K. may vote to leave the EU.
It may seem crazy that 11 sovereigns have negative-yielding five-year debt. Hard though it is to accept, bondholders aren’t playing the greater fool. Central banks are primed to push yields lower until they get results.
“It’s a mad scramble for defensive positions,” said Jack McIntyre, a bond manager with Brandywine Global Investment Management. “We’re competing against the world’s central banks” for bonds.
Trends in consumer prices haven’t acted as a brake. Inflation in advanced economies fell to 0.3% last year, the least since 2009 and down from 1.4% in 2014, according to IMF data.
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