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Bond party back on for investors – for now

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

The US budget deficit has reached 5.5% of GDP

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%. 

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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”. 

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