Richard Dingwall-Smith, chief economist at Scottish Widows Investment Partnership, says central bank...
Richard Dingwall-Smith, chief economist at Scottish Widows Investment Partnership, says central bankers' role as controllers of inflation has been replaced with that of keeping global economic activity on the boil.
He says: 'The change in thinking is not limited to the US. Europe's central bankers are showing increasing concern over economic weakness, particularly in Germany. Even in the UK, there has been some knock-on impact. The Monetary Policy Committee's interest rate decisions have become increasingly driven by the downside risks to global activity rather than domestic developments.'
He says: 'On the face of it, this is good news for government bond markets. The prospect of sustained low interest rates has helped to pull yields down, producing capital gains on existing issues. But investors now face a dilemma over whether to buy bonds on historically low yields.'
He says: 'For policymakers, low yields on longer-dated instruments are part of the solution to weak economic activity and depressed equity markets. For bond investors, low yields imply significant risks. Certainly, it is true that the global upturn may be less robust than many seen over the last 50 years.'
'It is probable that in a year's time, central banks will be looking at a situation in which a recovery is well established and the risks of deflation are much diminished.
'As a result, central banks will move policy back to a much less accommodating setting. But before then, government bond yields are likely to start adjusting upwards as investors sense the phase of cheap money is coming to an end.' Sandra Holdsworth, executive director at Threadneedle and manager of the company's global bond and European bond funds, is fairly sanguine about the prospects for government bonds. Banks are unlikely to tighten monetary policy, inflation is unlikely to rise and the economic environment will continue to be supportive to government bonds, she says.
She has a slight preference for European government bonds over the US. Treasury yields in the US have risen to above 4% from their lowest level since the late 1960s but are still not equal to Europe and the economic outlook in Europe looks more gloomy, she says.
Following the recent Irish yes vote to EU enlargement, Eastern European government bonds are more attractive, she adds.
The EU will now go through negotiations about the first wave entrance of Poland, Hungary and the Czech Republic, so the bonds of those countries should fare well, says Holdsworth. The only problems could be the illiquidity of those markets and if any governments refuse to meet EU guidelines for entry.
John Godley, head of global fixed income at Sarasin, says European corporate bond markets will continue to be volatile going forward with auto stocks and communications the most uncertain.
Government markets have fared well year to date and will continue to do so on the back of poor equity markets, he adds.
He believes there could be a stabilisation in corporate bond markets in the next three months and says if he buys corporate bonds, the bulk will be in the UK where bankruptcy laws are reasonably bond friendly.
Government bond markets look steady.
Bankers supporting global economies.
Low interest rates supportive.
Corporate bond markets still volatile.
Opportunities in Eastern European bonds.
Deflation threat remains.
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