Possible Double-Dip Watch
Richard Milne, David Oakley, and Michael Mackenzie of the Financial Times:
Key bond yields fall amid global growth fears: Benchmark government bond yields in the US, UK, Germany and Japan have fallen unexpectedly over the past seven weeks as investors take fright at weakening economic prospects and the still-critical eurozone debt crisis. The fall of 14 to 15 per cent in 10-year yields, the benchmark market interest rates for government bonds, has coincided with a sharp fall in inflation expectations in the same countries. “The global economy in February, March and April clearly slowed down and that will continue in May and June. That explains much of the fall in yields,” said Robert Parker, the head of the International Capital Markets Association’s investor council. “But you are probably going to get a [positive] surprise in July and August.”
Such a big move in bond markets is significant because the vast majority of investors at the start of 2011 thought government bond yields would rise consistently over the course of the year as economic growth normalised. But growth in the US and UK in recent months has fallen short of initial forecasts. Bond investors are also fretting about the end of the US Federal Reserve’s policy of buying Treasury bonds, known as quantitative easing. “The market is rather concerned about what comes after the Federal Reserve stops printing money and what it means for growth,” said Steve Lear, deputy chief investment officer at JPMorgan Asset Management.
Anthony O’Brien, strategist at Morgan Stanley, said: “The government bond markets are telling you that the industrialised economies are going to see very little growth this year and probably not much growth for a few years to come.” Investors say other reasons have contributed to the fall in yields, including the debate in the eurozone over a Greek debt restructuring and a fall in commodity prices that has lessened the pressure on central banks to raise rates. Some investors have also been forced to cover their negative bets on government bonds as buying from the Fed has pushed yields ever lower...
