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Last updated: June 1, 2014 6:46 pm
There is still time for 67 economists to be right. Polled by Bloomberg in April, every one of them predicted that US bond yields would be higher by October. Not quite. In fact, so far in 2014, yields have fallen 60 basis points. They have thus recaptured most of the movement since the Federal Reserve prompted a market tantrum a year ago when it began to consider tapering its bond purchases. Consensus was complacent.
What happened? Gravity, perhaps. Somewhere in the region of a 2.5 per cent yield has been the level for 10-year Treasuries since the crisis, to which it has now returned. If short-term interest rates ultimately stay closer to 2 per cent than 4 per cent in a long and slow US recovery, long-term debt will not need to trade much higher.
For those inclined to market technicalities, there are other theories. Complacent managers of bond funds had to catch up as the market’s direction turned, their buying in turn extending the Treasury rally. Foreign purchasers and corporate pension funds also belong in the line-up, although diminished supply is the prime suspect. Deutsche calculates that net issuance of Treasury debt is down 60 per cent this year, compared with 2013. Meanwhile RBS puts global demand for safe debt at $1.2tn: double its estimate for global supply.
Indeed, looking at that global picture reinforces the extent of demand for safe assets. UK Gilts have followed US yields down. The 10-year Bund yield is unusually low relative to Treasuries also. At 110 basis points, the spread is more than three times the average of 30 basis points since the euro was formed, although the gap largely reflects differing inflation expectations in the two regions.
The lesson: look for complacency. In the UK, a recovery is under way and housing has heated up. Gilts, while trading like Treasuries, offer less liquidity. Can they continue tracking US debt? Don’t ask the economists. They have no idea.
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