Bond traders declare inflation dead after yields fall
Tuesday, 27 April 2010
NEW YORK, Apr 26 (Bloomberg): The bond vigilantes who punished governments for profligate spending in past years have gone into hiding.
Sovereign bonds yield an average 2.385 per cent, about the same as a year ago and below the average of 3.08 per cent in 2008 when the credit market seizure led investors to seek the safety of government debt, according to Bank of America Merrill Lynch index data.
The cost to borrow is steady even though the amount of bonds in the index that includes nations from the US to Germany and Japan has grown to $17.4 trillion from $13.4 trillion two years ago.
While the debt helped the global economy recover from its first recession since World War II, yields show bond investors aren't troubled that the growth will spur inflation. Consumer prices excluding food and energy costs rose 1.5 per cent in February from a year earlier in the 30 countries that form the Organisation for Economic Cooperation and Development, the smallest gain on record.
"The fact that inflation is very well behaved, that provides the cover for central banks to remain on the sidelines and continue to pursue accommodative policies to help the economy," said Thomas Girard, a senior money manager who helps oversee $115 billion in fixed-income assets with New York Life Investment Management in New York.
Girard is no longer bearish on Treasuries, even though some of the world's biggest investors, including Bill Gross, manager of the world's biggest bond fund, say the best is over for bonds.
Girard extended the duration of the US Treasuries he oversees this month to match that of benchmark indexes from a so-called underweight position.
Steady yields are helping US President Barack Obama, German Chancellor Angela Merkel, UK Prime Minister Gordon Brown and Japan Prime Minister Yukio Hatoyama finance deficits and spur their economies.
The US paid $383.4 billion in interest on its debt in fiscal 2009 ended Sept 30, down from $451.2 billion in the previous year, according to the Treasury Department. That represented 3.2 per cent of gross domestic product, down from 4.6 per cent a decade earlier, when Bill Clinton was president and the US had a budget surplus.
Demand for US government bonds is increasing. On average, the Treasury received $3.21 in bids for each dollar sold at 10-year auctions this year, compared with $2.63 in 2009 and $2.41 from 2004 through 2008, according to data.
"Part of what's frustrated bond vigilantes has been that economic data has ratified the notion of modest growth and continued declining inflation," said Wan-Chong Kung, a money manager who helps oversee $89 billion at FAF Advisors in Minneapolis, the asset-management arm of US Bancorp.
The term bond vigilantes was coined by economist Edward Yardeni in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds.
Economists at the securities unit of London-based Barclays Plc, Britain's second-largest bank, forecast in an April 23 research report that inflation in developed nations will hold steady at an annual rate of 1.5 per cent through the end of the year before slowing to 1.4 per cent in mid-2011.
Federal Reserve Bank of Atlanta President Dennis Lockhart said in an April 15 speech that he is paying "serious attention" to disinflationary pressures. The "moderation in inflation has been broadly based," Fed Chairman Ben S Bernanke said a day earlier in testimony to Congress.
Consumer prices rose 1.4 per cent in the 16-member euro region in March from a year earlier instead of a previously reported 1.5 per cent, the European Union's statistics office in Luxembourg said April 16.
The report came a week after the Frankfurt-based European Central Bank kept its benchmark rate at a record low of 1 per cent and President Jean-Claude Trichet forecast inflation will remain "moderate" through 2010.
Japan may say this week consumer prices excluding fresh food dropped for the 13th consecutive month in March, based on the median estimate of 20 economists surveyed by Bloomberg News.
Traders see prices falling an average 0.9 per cent annually for the next five years, yields on inflation-linked bonds show. s
Sovereign bonds yield an average 2.385 per cent, about the same as a year ago and below the average of 3.08 per cent in 2008 when the credit market seizure led investors to seek the safety of government debt, according to Bank of America Merrill Lynch index data.
The cost to borrow is steady even though the amount of bonds in the index that includes nations from the US to Germany and Japan has grown to $17.4 trillion from $13.4 trillion two years ago.
While the debt helped the global economy recover from its first recession since World War II, yields show bond investors aren't troubled that the growth will spur inflation. Consumer prices excluding food and energy costs rose 1.5 per cent in February from a year earlier in the 30 countries that form the Organisation for Economic Cooperation and Development, the smallest gain on record.
"The fact that inflation is very well behaved, that provides the cover for central banks to remain on the sidelines and continue to pursue accommodative policies to help the economy," said Thomas Girard, a senior money manager who helps oversee $115 billion in fixed-income assets with New York Life Investment Management in New York.
Girard is no longer bearish on Treasuries, even though some of the world's biggest investors, including Bill Gross, manager of the world's biggest bond fund, say the best is over for bonds.
Girard extended the duration of the US Treasuries he oversees this month to match that of benchmark indexes from a so-called underweight position.
Steady yields are helping US President Barack Obama, German Chancellor Angela Merkel, UK Prime Minister Gordon Brown and Japan Prime Minister Yukio Hatoyama finance deficits and spur their economies.
The US paid $383.4 billion in interest on its debt in fiscal 2009 ended Sept 30, down from $451.2 billion in the previous year, according to the Treasury Department. That represented 3.2 per cent of gross domestic product, down from 4.6 per cent a decade earlier, when Bill Clinton was president and the US had a budget surplus.
Demand for US government bonds is increasing. On average, the Treasury received $3.21 in bids for each dollar sold at 10-year auctions this year, compared with $2.63 in 2009 and $2.41 from 2004 through 2008, according to data.
"Part of what's frustrated bond vigilantes has been that economic data has ratified the notion of modest growth and continued declining inflation," said Wan-Chong Kung, a money manager who helps oversee $89 billion at FAF Advisors in Minneapolis, the asset-management arm of US Bancorp.
The term bond vigilantes was coined by economist Edward Yardeni in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds.
Economists at the securities unit of London-based Barclays Plc, Britain's second-largest bank, forecast in an April 23 research report that inflation in developed nations will hold steady at an annual rate of 1.5 per cent through the end of the year before slowing to 1.4 per cent in mid-2011.
Federal Reserve Bank of Atlanta President Dennis Lockhart said in an April 15 speech that he is paying "serious attention" to disinflationary pressures. The "moderation in inflation has been broadly based," Fed Chairman Ben S Bernanke said a day earlier in testimony to Congress.
Consumer prices rose 1.4 per cent in the 16-member euro region in March from a year earlier instead of a previously reported 1.5 per cent, the European Union's statistics office in Luxembourg said April 16.
The report came a week after the Frankfurt-based European Central Bank kept its benchmark rate at a record low of 1 per cent and President Jean-Claude Trichet forecast inflation will remain "moderate" through 2010.
Japan may say this week consumer prices excluding fresh food dropped for the 13th consecutive month in March, based on the median estimate of 20 economists surveyed by Bloomberg News.
Traders see prices falling an average 0.9 per cent annually for the next five years, yields on inflation-linked bonds show. s