Conspicuously, while US treasuries and UK gilts have evidenced the same price and yield trends as government bonds in the eurozone, neither market experienced the wholesale shift into negative yield territory that manifested elsewhere. Indeed, both the US and UK might almost qualify as high-yield in comparison.
Given the relative interest rate and inflation backdrops, this is not wholly surprising; all of the focus remains on when, not if, the US will hike rates and despite seemingly mixed messages, the UK’s Monetary Policy Committee is almost certain to tighten policy well before its euro counterparts.
Rate rises on the horizon
Meanwhile, as long-term expectations for inflation – as measured by 5-year forward rates – dropped to 1.5% in the eurozone, the corresponding metrics in the US and UK fell to 2.1% and 2.9%; deflationary fears were never quite as pronounced.
The UK and US have not been immune to the surge in bond volatility, however, which in the case of the US might be considered as something of a surprise given the underwhelming US economic data of late.
There is currently a belief that even the meagre annualised first-quarter growth figure of 0.2% will be revised lower, while the Federal Reserve Bank of Atlanta’s real-time GDP tracking model is currently indicating that growth will rebound to just a 0.8% pace in the second quarter.
If this proves to be correct, growth would need to average 4.7% in the second half for yearon- year real GDP to expand by 2.5% during 2015 as a whole, as implied by the Federal Reserve’s summary of economic projections.
This seems unlikely. The continued correlation of US treasuries is, in part, a reflection of the fact that higher German bund yields have reduced the relative appeal of US debt, while the rally in oil – with Brent crude moving from $46 to $68 in a little over four months – has caused inflation expectations to drift higher.
In conjunction with the weakening of the dollar, the move in US treasury yields is therefore not wholly unexpected. In the absence of a global growth rebound, it is likely that the back-up of yields in the US, UK and eurozone will remain limited.
In the US in particular, any growth acceleration in the second half will only bring forward expectations of interest rate rises, which, in turn, may allow the dollar to resume its uptrend. Paradoxically, this will then reduce the amount of tightening the Fed will need to undertake and which would be part of the reason that the dollar rallied in the first place.
Despite recent moves, it therefore still seems too early to call an end to the government bond bull market, irrespective of the consensus view.
