The prospects for 2000 will depend on the performance of the global economy, with the authorities ke...
The prospects for 2000 will depend on the performance of the global economy, with the authorities keeping a vigilant eye on inflationary pressures.
Conditions are very different from a year ago, with economic growth strong and inflationary pressures rising. The world's government bond markets reflect this improving economic performance, and bond yields have climbed steadily higher.
Action by central bankers to date has been one of pre-emptive rate hikes to ensure that inflation doesn't gain a foothold in the global economy. Many forces are exerting downward pressure on prices: technological advances, increasing competition, deregulation and the internet, while upward pressures exist in the form of the increase in global activity, higher commodity prices and lower unemployment.
In the US, the record breaking period of economic expansion has continued, with 1999 another year of 4%+ growth. Domestic confidence remains high, boosted by the lowest level of unemployment for a generation and the wealth effect created by an ever rising stock market. Short-term rates have so far been raised by a total of 100bp to 5.75%, although Fed Chairman Greenspan's recent comments imply he is concerned that the economy may not slow sufficiently to cool inflationary pressures.
Rates will go higher still, being the only tool available to the Fed to maintain price stability. However, the recent rally in US Treasuries, with 10-year yields down to 6.40% from their mid-January high of 6.79%, signals confidence that the Fed will achieve its goal. US Treasury yields could push higher in reaction to further interest rate hikes, especially if the desired slowdown is not apparent. Countering this negative, the strong fiscal position will reduce supply of US Treasuries.
In Europe, the expected pick-up in economic performance will lead to interest rates being raised from their current 3.25% rate. However, given the high level of unemployment, a period of above trend growth in the euro-zone economies should not pose enormous inflation risks. The steep yield curve and 2% inflation ceiling target leaves European bonds offering good value at around 5.5%.
Recovery in the Japanese economy is fragile, and should the expected contraction in fourth quarter GDP be confirmed, Japan will again have dipped back into technical recession. Still dependent on government spending to aid its tentative recovery, the resultant budget deficit will necessitate further heavy issuance of Japanese Government Bonds (JGBs). While the Bank of Japan maintains its zero-rate policy, yields of below 2% for 10-year maturity bonds may appear attractive to local investors who are getting nothing on their cash deposits. In addition, JGBs are likely to benefit from domestic buying as enormous sums mature this year from 10-year postal savings accounts. International investors will struggle to appreciate the value in JGBs, given the much higher yields available elsewhere in the world.
Phil Roantree is fund manager at Aberdeen Asset Management
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