The flight to bonds as a shift into more secure investments has accelerated after the US attacks on ...
The flight to bonds as a shift into more secure investments has accelerated after the US attacks on Afghanistan, but gains may be limited as demand lowers expected yields.
According to statistics from Bloomberg, Treasury notes rose for nine out of 10 days up to 8 October, with the 2.75% note maturing in September 2003 rising 31 cents per $1,000 as its yield fell two basis points to 2.68%, the lowest level since 1958.
John Maskell, economist with Barclays Capital, says the group does not feel the market is fully aware of how bad the slowdown is going to be, especially in the European bond market.
He says: 'Our economists have a 2002 GDP forecast of 1% and an end of year 2002 core inflation forecast of 1.6%. Adding these together gives a nominal GDP of around 2.5%, which should translate into lower bond yields sooner rather than later, a steeper curve and possibly narrower swap spreads. Our long-term view is that the European curve should be steeper than that in the US due to relatively higher budget deficits, higher unemployment, smaller pension funds, a younger population and smaller holdings of equities.'
As indicators point to a long-term downturn in the US market, the flight to quality is likely to continue. Robert DiClemente managing director at Salomon Smith Barney, says: 'The National Federation of Independent Business' survey indicated that the blow to confidence echoed earlier consumer surveys. Meanwhile labour data continues to show deterioration in the job market ahead of the attacks, which also worsened after them. The two developments make for a vicious mix: rising unemployment and the spill-over to confidence already battered by September 11.'
While corporate bonds are offering higher yields globally, different areas of the bond market are continuing to draw investor attention as government debt is seen as attractive defensive play, says Rod Davidson, head of global fixed income mandates at Aberdeen Asset Management. Demand for higher risk bonds is not likely to be so strong, according to Davidson. He says: 'We are now sticking to very high-quality AAA rated paper.' He argues that the extended nature of the downturn in the US means that it is important to buy paper that is not coming from companies that are cyclical in nature.
'We remain cautious on cyclical paper because I think we are entering the second phase of a downturn. This means that our risk appetite has fallen and we are staying away from higher risk bonds.'
Paul Thursby, portfolio manager at Baring Asset Management, says that he is staying out of corporate bonds altogether. He points out that the yield curve has become steeper because of falling interest rates. He says: 'There is an expectation that long term interest rates are falling and long term bonds have remained unchanged.'
Bloomberg data also points out that demand for bonds has been boosted because of expectations of continuing slow growth in the global economy and the financial group believes that this slow growth will prompt the Federal Reserve to lower interest rates for the tenth time this year. DiClemente points out that the US government is keen to aid liquidity through the issuance of paper.
Demand for bonds has increased.
Long-term bonds have a relatively high yield.
Government debt seen as secure.
Corporate paper seen as increasingly risky.
Bond gains limited because of situation.
Consumer confidence low, unemployment up.
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