Many commentators in 2008 thought that in the aftermath of the global financial crisis government debt issuance would rise, and as a result yields would have to rise to accommodate the extra supply.

In fact, the opposite has proved true, and instead we have moved into a low-inflation world with correspondingly low cash rates.

As you can see from the chart below, the total return on a broad global government-bond index has been just under 47% over the last nine years.

Bank of America Merrill Lynch Global Government Bond Index total return – 10 years to 31 August 2017

Source: Bloomberg, September 2017

 

Over the same time period, the face value of this index has doubled from U.S.$12.25 trillion to U.S.$24.5 trillion – a staggering U.S.$113 billion each month.

So where has the demand come from? The central banks have been the most voracious buyers, purchasing on average U.S.$100 billion a month.[1] Investors have also been moving up the curve as positive rates on cash have disappeared. Elsewhere, there is also a healthy growth in household savings (see below chart), some of which has found its way into the safe-haven bond markets. According to Deutsche Bank research, of the U.S.$1.8 trillion saved each year by 27 OECD (Organization for Economic Cooperation and Development) member countries, approximately U.S.$150 billion needs to be invested in stocks and bonds every month.

Source: OECD, Deutsche Bank Global Markets Research.
Note: Countries are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Ireland, Italy, Japan, South Korea, Luxembourg, New Zealand, Netherlands, Norway, Poland, Slovakia, Spain, Sweden, Switzerland, U.S., France, Portugal & UK.

 

At present, governments are starting to lean away from fiscal austerity, and central banks are starting to slow their buying of bonds, and in the case of the U.S. Federal Reserve reversing the process altogether.

However, while central banks and governments are changing tack, one thing that hasn’t changed is the low-growth, low-inflation environment. We believe the four Ds – debt, demographics, disruption and distortion – could help explain this influence…

Whether it’s the disruptive force of online retailers changing the way goods are bought and sold, or the baby boomers leaving the workforce and destroying the relationship between low unemployment and inflation, one thing is clear in our mind: bond yields are unlikely to rise too far before these high debt levels become difficult to service and growth starts to suffer once more.

While we do not believe this would stop yields rising from current levels, we do believe it provides a cap that may not be too far away.

 

[1] Source: Newton, 2017

 

Authors

Paul Brain

Paul Brain

Investment leader, fixed income

Comments

Your email address will not be published.

Newton does not capture and store any personal information about an individual who accesses this blog, except where he or she volunteers such information, whether via email, an electronic form or other means. Where personal information is supplied, it will be used only in relation to this blog, and will not be collected or stored for any other purpose. Comments submitted via the blog are moderated, and, as a result, there may be a delay before they are posted.

This is a financial promotion. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.

Important information

This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.

Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.

Explore topics