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Bond sell-off 'overdone' as US, European recoveries falter
The retreat from government bonds was more emphatic during the so-called "taper tantrum" of 2013, analysts say. Photo: Bloomberg
The recent sell-off in bonds around the world has driven yields to year-to-date highs, prompting calls of a "correction" and "rout" as traders and investors unwind positions built up over more than a year.
However, as dramatic as recent movements have seemed, yields are still low by historical measures, say economists.
They also say any further sustained yield increases would have to reflect real economic fundamentals, such as improving growth or changing inflation expectations in Europe and the US.
With retail data this week confirming the spluttering nature of the US economic recovery, and the European comeback still fragile, implied bond returns will ease back, they say.
"Viewed over short horizons, the surge in yields is dramatic," says Capital Economics' Paul Ashworth. "From trough to peak, 10-year government yields in the US, UK and Germany have risen this year by around 70 basis points.
"Step back a bit, though, and these moves pale into insignificance," he said.
The current 0.72 per cent yield on the benchmark 10-year German Bund, for example, looks tiny beside a five-year high of 3.49 per cent in April 2011.
In any case, the retreat from government bonds was more emphatic during the so-called "taper tantrum" of 2013, when the US Federal Reserve announced it would begin scaling back its $US70 billion a month bond-buying, or quantitative easing, program.
"The 2013 surge was much larger and it was ultimately reversed," Mr Ashworth said.
Australia's Clime Asset Management has also urged investors not to over-react to the recent bond market correction by dumping yield stocks in favour of equities that typically do better when economies are growing.
It, too, argues that while the recent bond market sell-off was overdue, it has also been overdone.
"A lot of people – commentators and investment banks – are telling investors to get out of yield stocks and get back into growth," Clime said in a note.
"Their reasoning is that bond yields usually rise following a recession as the market predicts an economic recovery and inflation.
"But we don't think this bond correction is indicative of a surge in inflation around the world, or a growth cycle recovery," it says. "The correction was simply indicative of a mispriced bond market."
This view has become the mantra among an array of fixed-income specialists, many of whom foresaw the current volatility in fixed income and currency markets.
They argue that the correction, partly brought on by short-selling tips from a line-up of bond market luminaries, reflects more the easing of disinflationary pressures around the world than the emergence of inflation.
A sustainable pick-up in growth rates would have to crystallise before bond yields settled into an upward trajectory.
For Australia, the bond sell-off, along with recent weakness in the US dollar, has created a new headache for Reserve Bank governor Glenn Stevens, who is keen to see a lower domestic currency.
"While this international [bond] sell-off was in full swing, the RBA cut rates but dropped the explicit easing bias, thereby kicking an own goal with regard to policy objectives," said Charlie Jamieson from Jamieson Coote Bonds.
"It is a staggering move that seemingly uses monetary policy ammunition but achieves none of the stated policy objectives.
"The currency has spiked higher, rates have sold off and widened on cross market, equities sold off on higher rates, bank funding costs have risen, and property continues to bubble up in noted Sydney and Melbourne markets."
National Australia Bank's global co-head of foreign exchange strategy Ray Attrill agrees there is little relief in sight for those wanting a weaker Australian dollar.
"We still think foreign exchange intervention prospects – from the RBA in particular – are very low, but that unless and until the US dollar perks up alongside better data, there is little prospect of a meaningful near-term reversal in the Australian dollar."