Bond party back on for investors – for now

Fear of the coronavirus has sent investors retreating to their habitual comfort zone: government bonds.

Fear of the coronavirus has sent investors scrambling into safe-haven assets. At $1,582 an ounce, gold recorded its highest price since April 2013 this week. Money managers are also retreating to their habitual comfort zone: government bonds. US ten-year Treasury yields fell to a four-month low of 1.61% this week as prices rose. Germany’s ten-year Bund hit an eight-week low on -0.35%. 

Last year was a great one for bond investors, says Carla Fried in The New York Times. The yield on ten-year US Treasuries fell from 3.25% in late 2018 to as low as 1.45% last September. The Vanguard Total Bond Market Index gained almost 9%. A mid-year panic that recession was around the corner triggered a rush into the perceived safety of US Treasuries. Three Federal Reserve interest rate cuts prodded more people’s savings into the bond market. Yet with many economists predicting a stronger global economy this year, “the great bond party” could be drawing to a close.

Investors still seem happy to extend credit to profligate states, says The Economist. Trump’s tax cuts have sent the US budget deficit up to 5.5% of GDP, “the largest of any rich country”. The economy hardly needs support: joblessness is at a 50-year low.

In the past, “bond vigilantes” would have punished such a debt binge by sending government borrowing costs spiking. Yet markets are still happy to buy ten-year US Treasuries at sub-2% yields. Part of the reason is that, scarred by memories of the Great Recession, American households have more savings to invest than in the past. US Treasuries also pay higher interest rates than those in Europe. The world’s “voracious appetite” for safe assets looks set to continue. Whether such loose fiscal policy is “economically sensible is a different matter”. 

Recommended

The charts that matter: China’s recovery bolsters the yuan
Global Economy

The charts that matter: China’s recovery bolsters the yuan

China's strengthening currency is a sign of confidence in the country's economic recovery. John Stepek looks at the yuan chart, and all of the others …
19 Sep 2020
The charts that matter: has the dollar’s rally paused, or is it over?
Global Economy

The charts that matter: has the dollar’s rally paused, or is it over?

The US dollar ended the week higher, although off its highest point. Is that it? John Stepek looks at how it's affected the charts that matter most to…
12 Sep 2020
The charts that matter: a correction for gold and better news on US jobs
Global Economy

The charts that matter: a correction for gold and better news on US jobs

Having ended on a record high last Friday, gold took a big tumble this week. John Stepek looks at the gold price chart, along with the others that mat…
15 Aug 2020
The charts that matter: precious metals, longevity and a cure for baldness
Global Economy

The charts that matter: precious metals, longevity and a cure for baldness

As the gold price presses on to new highs, John Stepek looks at he charts that matter most to the global economy.
8 Aug 2020

Most Popular

Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
IAG's share price is ready for take-off - here's how to play it
Trading

IAG's share price is ready for take-off - here's how to play it

The owner of British Airways has had a turbulent year, but is now worth a punt. Matthew Partridge explains the best way to play it.
8 Sep 2020