Exaggerated inflation fears, rate cuts and the potential for a longer than expected recession in t...
Exaggerated inflation fears, rate cuts and the potential for a longer than expected recession in technology spending could be good news for investors in US bonds, according to Bob Attridge, head of bonds and Treasury at Old Mutual Asset Managers.
However, Attridge's view is a contrarian one and other managers see signs that the market may be beginning to unwind in the face of improving economic indicators.
Attridge says: "Late last year, bond prices rose sharply as investors anticipated a fall in interest rates as policymakers responded to the gathering evidence of a sharp slowdown in the growth of US economic activity.
"Not only have US interest rates been cut sharply but cuts have been widespread around the world. At the same time, budget surpluses have remained large and the growth of economic activity has continued to slow, while industrial production has been falling since last summer."
Despite that, Attridge says yields on US Treasuries have changed little, indicating that investors anticipated the economic and policy developments of early 2001 around three to six months ago.
He says: "Bond investors may have already adjusted to the recent good news but it seems likely they will soon have more to enjoy. As the evidence comes in, it seems likely that the recession will be worse than was thought initially.
"Just as confidence in the US evaporated rapidly a few months ago, it seems to be disappearing in Europe now. As the downturn spreads around the world, it intensifies and the multiplier and accelerator effects on consumption and investment have yet to be suffered as unemployment is only just starting to rise and profits fall, globally."
Investment, particularly in the technology of the new economy, has been very strong and could remain low for years as the new capacity is absorbed. That is likely to keep inflation muted. Inflation may not only fall more than expected, intense competition could keep it low even when activity recovers, Attridge says.
Joe McKenna, head of fixed interest at Britannic Asset Management, says markets have softened up over the past couple of weeks and that real yields in the US are not that attractive. He believes there are indications the market could be beginning to unwind its recession debt.
McKenna says two-year yields got down to just over 4% in the face of equities declining, but that reflected a steepening of the yield curve and there has been little change at the long end.
He sees no net sellers as the government bond market is shrinking, but also sees no net buyers as US portfolios are long against the market.
McKenna says: "Both technically and fundamentally, I am of the view that the market in the US still looks fully valued. If you focus on the economic data coming through, it hasn't all been bad, particularly the housing market and car sales.
"Real earnings are increasing and unemployment isn't that bad yet, although that would be the one caveat for me. If unemployment got a lot higher from here then the risk of a recession would look higher than it does now."
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