* Thirty-five years of bond market gains may be over
* Central bank policy turn could be watershed moment
* Shifts in demographics, globalisation changing tide
* But disinflationary forces should keep yields low
By John Geddie
LONDON, Sept 30 No one yet has made money from
calling an end to 35 years of gains in world bonds, but that has
not stopped investors fretting that an era of central bank
largesse is drawing to a close and a seismic shift in global
markets is under way.
When the biggest debt funds say prices will fall and
newspaper columns warn of a bubble set to burst and wreck
people's savings, even sceptics find it hard to dismiss the
latest episode of jitters as just another ill-advised attempt to
call the bottom of the longest bull market in history.
Economists argue shifts in demographics and globalisation
are finally turning the tide, while policy-watchers say the Bank
of Japan's commitment last week to draw a line under further
yield falls is the watershed moment they have been waiting for.
But even for those bold enough to call the turn, the pace of
the change in a world devoid of growth and inflation could mean
years of waiting to find out if they were right.
"You can easily imagine looking back on last week in two or
three years time and saying the BOJ was the start of this," said
Michael Metcalfe, head of global macro strategy at State Street.
In the world's largest economy, the United States, yields on
10-year government bonds have steadily fallen from
around 15 percent in the early 1980s to record lows earlier this
year of 1.37 percent.
In Japan and Germany, yields of around 8 percent a couple of
decades ago are now below zero -- meaning demand for their debt
is so high that investors are paying for the privilege of
lending to these governments.
Economists at M&G say these broad trends can be explained by
a population boom after the World War Two which boosted the
workforce at the end of the 20th century, keeping wage inflation
low and the need for savings assets like bonds high.
Since the 2008 global financial crisis, central banks have
played a much more direct role in keeping yields low -- slashing
interest rates and spending trillions of dollars on bond-buying
splurges to try and bolster a fragile economic recovery.
And over the last decade, Reuters polls show that economists
have consistently overcooked their expectations for bond yields,
expecting central bank efforts to nurture growth and inflation
to finally pay off. Graphic: tmsnrt.rs/2d9UNq8
So why should Deutsche Bank's claim that the demographic
trends that have driven markets are reaching 'inflection point',
or bond giant PIMCO's expectation that yields will rise as
central banks run out of rope, carry more currency now?
Partly, it seems, these warnings come as investors are
losing faith in the ability of financial assets to appreciate
The latest monthly survey by Bank of America Merrill Lynch
showed fund managers reckon equities and bonds combined are near
their most overvalued and have ramped up their holdings of cash
as a result.
Investors also get wary when terms like 'bond bubble' start
to enter public discourse. Google searches for the term have hit
their highest in over a year in recent weeks and cropped up in
stories from the Sydney Morning Herald to Germany's Die Welt and
Britain's The Times.
"The more people talk about it, the more likely it becomes.
Investment decisions are made on a mixture of emotion and
analysis, so it can prove self-fulfilling," Louis Gargour, chief
investment officer at LNG Capital, said.
But while some bond market veterans agree a three-decade
rally may have run its course, they are not expecting a sharp
They argue that even if the BOJ's shift last week is a tacit
acknowledgment that monetary policy is reaching limits,
heavily-indebted governments have little room to take up the
slack with fiscal stimulus.
And with their banks stuffed full of bonds that would be
battered by a sharp rise in yields, authorities will be eager to
keep inflation under control.
"When people think things are completely mispriced and there
is going to be blood on the streets, their model is often that
they expect rates to return to the post-war average," said
Andrew Balls, PIMCO's bonds CIO.
"The argument between 1.5 and 2.5 percent is much more
modest than the argument between 5 and 6 percent."
There are, of course, more alarming scenarios out there.
Jim Leavis, head of retail fixed interest at M&G, said
signs of a turn towards protectionist trade and labour policies
-- as seen through Britain's vote to leave the EU in June and
the rhetoric of U.S. presidential hopeful Donald Trump -- could
stoke inflationary pressures through wages in certain countries.
"If globalisation went into reverse, I think you would end
up with higher inflation and bond markets would have a rough
time," said Leavis.
"Our view is that yields are too low here, but they probably
stay lower than people expect for a long time."
On the other side though, said Leavis, developments in
technology could see many jobs automated, keeping downward
pressure on wages.
The consensus appears to be -- not least because of a
slowdown in the world's second biggest economy China -- that
disinflationary forces have the upper hand.
For Standard Life's Andrew Milligan, an investment veteran
of 30 years, this has created an expectation that while the bond
rally may be over, any reversal may be a long time coming.
"Although the bull market in bonds may be over, that doesn't
mean a bear market is beginning."
(Reporting by John Geddie, Dhara Ranasinghe, Abhinav
Ramnarayan; Writing by John Geddie; Editing by Toby Chopra)