Advertisement

The bond bubble keeps inflating

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

US Capitol Building © Getty Images
Washington’s annual overspend is hurtling towards $4trn © Getty

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%. 

Advertisement - Article continues below

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”. 

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/511283/investors-are-going-bonkers-for-bonds
Bonds

Investors are going bonkers for bonds

In a further sign of the mania gripping the bond market, Germany issued €3.15bn of zero-interest ten-year bonds last week.
18 Jul 2019
Visit/economy/global-economy/601466/the-charts-that-matter-the-green-shoots-of-global-recovery
Global Economy

The charts that matter: the green shoots of global recovery?

With US employment data coming in much better than expected, John Stepek looks at how that’s affected the charts that matter most to the global econom…
6 Jun 2020
Visit/economy/global-economy/601425/the-charts-that-matter-the-us-and-china-the-calm-before-the-storm
Global Economy

The charts that matter: the US and China – the calm before the storm?

John Stepek looks at how the rising tension between the US and China over Hong Kong has affected the charts that matter the most to the global economy…
30 May 2020

Most Popular

Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020
Visit/economy/eu-economy/601463/why-a-stronger-euro-is-good-news-for-investors
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020
Visit/investments/stockmarkets/601460/disease-rioting-and-mass-unemployment-so-why-are-markets-soaring
Stockmarkets

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020