Although the outlook for global bonds has improved over recent months, we remain modestly negative o...
Although the outlook for global bonds has improved over recent months, we remain modestly negative on the asset class over the medium term.
There is considerable debate as to the risks associated with slowing economic growth, especially in the US. In our view the risks are limited. Growth in the US, Europe and the UK is slowing, but should remain at, or close to, trend well into 2001. This should preclude any monetary easing from respective central banks over the medium term.
In the US, short-dated bonds remain overvalued, with two year Treasury yields trading 60 basis points lower than the official Fed Funds rate. We do not share the market's expectations of a major reduction in base interest rates early in 2001 and consequently find these securities unattractive over a six-month time horizon.
Economic data has been weaker over recent months but there is still evidence to suggest growth in the US will remain robust going into 2001. Another reason to think that overall economic activity will not weaken drastically is that personal income growth remains strong and is unlikely to turn down suddenly in the months ahead.
Longer-dated Treasury bonds are more attractive over the medium term and we are positive on the 10 to 30 year sector of the curve. Supply/demand dynamics associated with the improved fiscal environment and the prospect of further buybacks will continue to support these securities. However, we remain vigilant on the potentially bond negative spending plans that the new US administration may introduce next year. Overall, we are slightly negative on the US market and our exposure remains concentrated in a barbell strategy of long-dated bonds and cash.
Europe is our favoured market on a relative basis and we expect the recent outperformance to continue over the medium term.
Positive factors for euro bonds include continued declines in the IFO index and our anticipation that inflation has peaked. We do not anticipate a major downturn in the European economy, but relative to the US, bond valuations are more attractive. We are also positive on the medium term outlook for the euro, although negative short-term dynamics continue to depress the currency.
Our views on Japan are negative over the medium and we expect a moderate rise in the long-dated yields to around 2% over a six-month time horizon. While there are short-term factors which may be bond market positive, the Bank of Japan has acknowledged the economic recovery may be peaking early and the factors contributing to the positive CPI may be waning.
These conditions would normally be bond positive but, given Japan's mounting debt levels, the possibility of further supplementary fiscal stimulation is bond negative.
Mark Dowding is head of global fixed interest at Invesco Asset Management
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