“The mood has been lower for longer is going to be the trade forever but it has been eight years that interest rates have been so low, and there is so much debt that has been created,” Brookes stressed. “Already we have had the Federal Reserve, Bank of England, European Central Bank and Bank of Japan perform quantitative easing at the margin, followed up by major bond buying sprees. The central banks are pretty much all in when it comes to bond purchases so I cannot see who the next natural bond buyer is going to be. And the inflation trends are actually negative for bonds so why would you own them? We said that when the UK 10-yr was yielding 2%. Today it is only yielding 1.4%.”
Because of the stronger than anticipated economic data, Brookes cannot see how his outlook on inflation will prove incorrect without another round of QE from the BoE, which he thinks is highly unlikely.
“I cannot see how bond prices will go up absent a buyer who is not price sensitive, which is what the BoE might be, if it needs to do another round of QE. But we cannot see why they need to do another round as economic trends are OK at the moment. I think we would need another significant mistake to be made around Brexit for bond yields to go lower, and I don’t think that is in anyone’s interest really. I think bonds need to sell off quite substantially.”
However, Brookes doesn’t think it is inconceivable that the UK 10-year bond will be yielding over 2% next year. “At the back end of 2017, you might even see us buying bonds,” he said.
