The bond bubble keeps inflating

Most major stockmarkets remain down on the year, but government bonds continue to gain ground.

In times of crisis, investors traditionally look to bonds to cushion the pain. Most major stockmarkets remain down on the year, while government bonds have gained ground. The yield on the US ten-year Treasury has fallen from 1.8% at the start of January to about 0.7%. Germany’s ten-year Bund yield has fallen further into negative territory, down from -0.22% to almost -0.5%. 

Bond yields move inversely to prices, so falling yields imply capital gains for bondholders. The yield on the US two-year Treasury fell to a record low of 0.105% at the end of last week. 

The bond market is being driven by two key forces: higher government spending and central banks’ quantitative easing (QE), says Emily Barrett on Bloomberg. On the one hand, governments are issuing vast new tranches of bonds in order to pay for pandemic rescue measures. The US government is preparing to issue a record $96bn in new bonds over the coming weeks to finance an annual deficit ballooning towards $4trn. 

Bond investors would usually demand higher yields to fund all that new spending, but this effect is being counteracted by vast QE, with central banks soaking up much of the new bond supply with printed money. The Federal Reserve has bought $1.5trn in US bonds over the past two months, while the Bank of England has expanded its QE programme by £200bn. 

One reason that investors are willing to pay up for bonds with such low yields is that they do not have many other low-risk places to put their cash. Interest rates sit at just 0.1% in the UK and are negative in the eurozone. 

Futures markets show that traders think there is a chance American rates could also turn negative by the end of the year, says Justin Lahart for The Wall Street Journal. In such a severe crisis you should “never say never”. 

Recommended

Bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
The charts that matter: the dollar extends its fall
Global Economy

The charts that matter: the dollar extends its fall

The US dollar took quite the tumble this week. Here’s how the charts that matter most to the global economy reacted.
17 Apr 2021
The MoneyWeek Podcast: how to not lose money to inflation and financial repression
Investment strategy

The MoneyWeek Podcast: how to not lose money to inflation and financial repression

Merryn talks to Peter Spiller of the Capital Gearing Trust about how he navigated the last extraordinary year; what he's buying now; and how he plans …
16 Apr 2021
The US dollar will soon start to slide
Currencies

The US dollar will soon start to slide

The US dollar enjoyed its best quarter since 2018 in the first three months of this year, driven by higher US Treasury bond yields. But the period of …
16 Apr 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
What does the Coinbase listing mean for bitcoin and other cryptocurrencies?
Bitcoin

What does the Coinbase listing mean for bitcoin and other cryptocurrencies?

As the bitcoin price hit new highs, the world's biggest cryptocurrency exchange, Coinbase, listed on the stockmarket. John Stepek looks at what that m…
15 Apr 2021
Properties for sale for around £400,000
Houses for sale

Properties for sale for around £400,000

From a converted church in Banffshire with views towards the Cairngorms National Park, to a period property in the Georgian market town of Beverley, e…
2 Apr 2021