A rally has swept through bond markets this month, expanding the global tally of negative-yielding debt to more than $13tn and confounding investors who had bet on higher yields.
Fears over the outbreak of the coronavirus in China have pushed investors to dump risky assets in recent days — wiping about $1.4tn off the value of global stocks since mid-January — and buy up the safest government debt.
The US 10-year bond yield touched a three-month low of 1.57 per cent on Tuesday, reflecting a rise in prices. German 10-year yields have hit their lowest since October at minus 0.4 per cent, while Japanese yields have also dropped this year.
The rush into government debt interrupts a global sell-off that began in the autumn after an upturn in the global economy — and a perception that central banks had run out of stimulus options — drove an exodus from very low-yielding debt. Many fund managers who had expected the selling to continue into 2020 have been caught short amid growing worries about the impact of the virus on China’s economy.
“The bottoming-out of global growth was supposed to unleash this reflationary wave that would see bonds sell off,” said Nick Wall, a fund manager at Merian Global Investors. “But as soon as there was evidence that not everything was so rosy, people gave up on those trades very quickly. A lot of people have closed out their positions.”
The debt rally underscores the enduring appeal of bonds as a counterweight that gains when riskier investments decline. “US Treasuries are one of the best insurance policies you can have in your portfolio,” said Andrea Iannelli, investment director at Fidelity International. “Whenever things get messy, that’s what you want to own.”
Mr Iannelli said the asset manager favours US government bonds, because the Federal Reserve has room to cut interest rates should weakness in China spill over into a broader global slowdown.
Bond markets around the world remain some way short of the extreme levels hit in August and September last year, when more than $17tn of bonds carried a sub-zero yield. Even so, that sub-zero total has expanded by more than $2tn since mid-January. The scale and speed of the bond rally has pushed yields back to levels that imply a bleak outlook for the world economy, and has left even some bond bulls wary.
The move in the Treasury market means that the US yield curve is close to inverting — meaning longer-term yields fall below short-term yields — as it did for much of last year. In the past, such an inversion has been an indicator that a recession is on the way, while most investors believe this year will bring modest if unspectacular growth.
“Generally whenever we have seen a big government bond sell-off I have been a buyer,” said Mike Riddell, a fixed income portfolio manager at Allianz Global Investors.
“But we are a bit bearish [on bonds] at these levels. Given the direction of global data, the rally looks a bit overdone. You can rationalise it by saying that because of coronavirus the growth outlook is far worse, but I’m not sure that’s what the market really thinks.”