Thereafter, core bond markets globally rallied significantly with the 10-year Treasury yield bottoming around 1.40% in mid-2012. What’s to stop a repeat of this pattern? After all, we have had plenty of false dawns over recent years whereby the markets (and central banks) have become overly exuberant over recovery prospects only to subsequently backtrack when the data takes a turn for the worse.
This time could be different. Firstly this is probably the first summer since 2008 that we haven’t had a crisis of one form or another (normally in the eurozone). This matters not only for markets but also for businesses and consumers. Stability breeds confidence. The composite balances on the manufacturing purchasing managers’ surveys are at two-year highs in the US, Eurozone and the UK and, more importantly, appear to still be on a rising trend.
For the equivalent services balance in the UK you have to go back to Dec 2006 for a higher level. Consumers are also more confident whilst various lending surveys point to an improvement in credit conditions, even in peripheral countries.
This is all relative of course and the improvement in many of these statistics is from a very low base. Still, the recent data seems somewhat inconsistent with the continued efforts of central banks to try and convince markets and the public that rates will stay lower for longer.
The five-year gilt yield in the UK, for example, is up roughly 100bps over the past four months despite the Bank of England’s introduction of forward guidance over that period. In the face of stronger data, markets are clearly sceptical of central banks’ ability to talk down bond yields. Indeed, US 10-year Treasury yield has decoupled from data trends, which is perhaps the clearest indication of how successful central banks have been in artificially depressing bond yields, in spite of the data.
The longer the economic recovery, the more central banks will find they are pushing into the wind. It will become a battle of wills that central banks will probably lose but this will ultimately be symptomatic of their success in fostering recovery and achieving so-called escape velocity.
Recognising these risks, the Invesco Perpetual Global Bond Fund is relatively short duration and is, on current evidence, likely to structurally remain that way for the foreseeable future. It is a very flexible fund, however, and its interest rate exposure is managed actively. Given the scale and speed of the move in bond yields and their secondary impact on some other sectors such as emerging markets, the duration of the fund has been taken up a bit recently but likely remains below many other bond funds that tend to track benchmarks.
