Global economic growth is rising as the Asian economies, especially Japan, rebound. The key question...
Global economic growth is rising as the Asian economies, especially Japan, rebound. The key question is how quickly will central bankers raise interest rates
In the US, further rate hikes are expected, despite the Fed's 'neutral' stance. Looking at the front end of the US yield curve (two-year notes minus Fed funds rate) a rise of 25 basis points is priced in
A further problem for the US is the increasing trade deficit with Japan, which is approaching $6bn for June and is increasing. This has led to a strengthening of the yen, which, if it continues, could lead to some repatriation of US assets by Japanese institutions
The major positive factor for the US bond market remains the low level of inflation. The two key commodity indices, JOC and CRB, show increases from their lows but still remain significantly below their historical highs, so input costs are likely to remain low. In addition, the greater use of e-commerce will be deflationary
The US long bond is now trading over 6%, and with the CPI barely above 2% for 2000 this offers a real yield of around 4%, suggesting there is value in US bonds. Furthermore, as December 1999 approaches the cautious investor will hold US Treasuries over the year-end adding a premium to them
The recovery in Europe, more precisely Euroland, has been very slow overall as it adjusts to the different growth rates in member countries. The interest rate in the peripheral countries, Spain, Italy and Ireland, is at an historically low level so it is not surprising that growth rates are high. The growth rates in France, Holland and Germany (62% of Euroland GDP) have been slow but there are early signs of recovery. This is evidenced by the recent strong industrial figures from Germany, and a slowing unemployment rate along with declining rates in France. In the short term there are only minor interest rate rises priced into the market, however, further forward looking at the strip curve in 2000, there are more aggressive rate rises factored in
Outside of Euroland, UK gilts look outstanding value. Inflation remains under control and likely to undershoot the Government's target of 2.5% given the extremely hawkish nature of the Bank of England. The yields in the 10-12 year area of 5.65% offer value
The Japanese bond market remains the most regulated and one of the most difficult to interpret. Bonds yielding 1.75% will always appear expensive to investors and they have been lower. With the possibility of increased government issuance and the artificially low short rates unlikely to last, it is difficult to see value
Government bond markets are factoring in, to a greater or lesser extent, interest rate rises. This has resulted in the recent sell-off in bonds. Whether the effect of the projected rises in interest rates have the desired outcome should be known by fourth quarter 1999, with the expectation that both the US and UK housing markets will lose their buoyancy. Currently the US and UK bond markets appear to be the most attractively priced
David Cryer is director, overseas fixed interest, at Clerical Medical Investment Group
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