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Global bond market surges most since 2008 as growth outlook dims

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(Bloomberg) -- The U.K.'s surprise vote to leave the European Union isn't seen having fallout as severe as the 2008 financial crisis, but you wouldn't know it from the rush to safety in the global market for sovereign debt.

Government bonds worldwide have gained 2.3% in June, the most since December 2008, according to Bank of America index data. The effective index yield is down to 0.5%, from 0.74% at the end of May, as investors bet that a Brexit vote would curb economic expansion and make it tougher for central banks in the U.S., Europe and Japan to stoke inflation.

"The bigger-picture story here is the profound lack of growth in the global economy," says Jeffrey Rosenberg, BlackRock's chief investment strategist for fixed income.

The yield on U.K. 10-year gilts touched a record low after Bank of England Governor Mark Carney said "material slowing" in the economy is likely and that officials will probably have to ease monetary policy this summer. The European Central Bank is said to be considering loosening the rules for its bond purchases to ensure enough debt is available to buy, sparking a rally in Italian and Spanish bonds. In the U.S., although the median call is for the economy to grow 1.9% this year, it would still be the smallest expansion since 2013.

Fixed income has posted steady returns in these markets, while once high-flying equities have come crashing down.
June 29

Even with global yields at or near record lows, the bond-market rally can continue because growth and inflation show few signs of increasing, according to Jeffrey Rosenberg, New York-based chief investment strategist for fixed income at BlackRock.

"The bigger-picture story here is the profound lack of growth in the global economy," Rosenberg said in an interview on Bloomberg Television. "Yes, unconventional monetary policy, yes, negative interest rates, all of those things pull those yields lower. But ultimately, where yields are going to go over the long run is a function of our growth outlook."


Benchmark 10-year U.S. Treasury note yields fell two basis points, or 0.02 percentage point, to 1.5% at 12:55 p.m. in New York, according to Bloomberg Bond Trader data. It fell as low as 1.45%. The price of the 1.625% security due in May 2026 was 101 5/32.

Bank of America's U.S. Treasury index has returned 2.4% in June, the most for a month since January 2015, when 30-year Treasury yields reached an all-time low 2.219%.

Demand for long-dated bonds has pushed the 30-year yield toward that record again, as it fell to as low as 2.25% Thursday from 2.65% at the end of May. Even as yields approach all-time lows, Treasuries remain alluring to investors compared with sovereign debt in countries such as Japan and Switzerland that offers negative yields across almost all maturities.

"We like duration, we like yield, and there's a massive need in this world for duration," Gregory Peters, who helps manage more than $600 billion at Prudential Financial's fixed-income operation, said on Bloomberg Television. "The yield isn't necessarily overly attractive or abundant, but that's the world we live in."

U.S. bonds have surged as traders slashed bets on the pace of Federal Reserve interest-rate hikes following the Brexit vote, which came less than two weeks after policy makers at their June meeting held rates steady and pared forecasts for future increases. Futures prices indicate about an 8% chance of a hike by year-end, down from a 74% probability seen as of the end of May, according to data compiled by Bloomberg.

Bloomberg News