Deflation fears push bond yields lower
Developed world bond yields plumbed new lows Tuesday as plunging oil prices, deflation fears and the prospect of further central bank easing triggered a flight to safety.
The yield on 10-year U.S. Treasuries fell below 2% to their lowest level since May 2013, while yields on similar bonds in Germany and Japan hit record lows.
Bonds gained at the expense of stocks, which fell across the globe. The S&P 500 ended the day down 17.97 points, or 0.89%, to 2002.61. The S&P/TSX composite index was down 145.93 points, or 1.01%, to 14,246.77.
Tuesday’s demand for safehaven bonds highlights the deep uncertainty that remains about the health of the global economy six years after the financial crisis.
“While much of the world’s attention is glued to the relentless slide in oil prices, there’s another massive (and related and equally important) story at play — the relentless plunge in bond yields,” said Douglas Porter, chief economist at BMO Capital Markets.
Deflation continues to be one of the biggest drivers of the rush into highly rated sovereign bonds, say analysts.
Deflation — a persistent decline in prices — is a particular threat to Western economies because it makes servicing their high debt loads more difficult, while also increasing risks that consumers will delay big purchases in the hopes that prices will drop even lower in the future.
The recent collapse in oil prices has also sparked worries that already tame inflation readings in most developed countries could drop into deflation.
Oil prices fell to new multiyear lows Tuesday. Brent crude, the global benchmark, fell US$2.01, or 3.8%, to US$51.10 a barrel, based on ICE Futures Europe contracts — the lowest level since April 2009.
The retreat in oil prices follows dismal data from the eurozone this week that suggests the 17-member bloc is on the verge of deflation. Data from Germany Monday showed that con- sumer prices rose only 0.1% on an annual basis in December, the lowest annual gain since the financial crisis.
Bill Gross, former head of the world’s largest bond fund and now portfolio manager at Janus Capital, said in an investment outlook Tuesday that 2015 could spell the end of the six-year bull market.
“When the year is done, there will be minus signs in front of returns for many asset classes,” Mr. Gross said. “The good times are over.”
The rally in bonds has defied the forecasts of many economists, who last year predicted that a strengthening U.S. economy and the end of an era of loose monetary policy by the U.S. Federal reserve would lead to a spike in record low bond yields.
Some market watchers Tuesday warned that growing deflation fears could lead to something that only a few months ago would have been unthinkable: the Fed delaying a rate hike — which many economists still expect to occur this year — until 2016.
“The disinflation story for the next several months in the U.S. is going to be compelling,” said David Ader, head of U.S. government-bond strategy at CrT Capital Group LLC in Stamford, Conn. “The part we’ll have to wrestle with soon is the Fed. Probably we’re going to put the Fed into 2016.”
If the Fed does hike this year, it will be in contrast to most other central banks in the developed world, which are either keeping their interest rates at record lows or actively carrying out easing programs.
The European Central Bank is expected to announce a round of qE at its Jan. 22 meeting to stem deflation threats.
Sal Guatieri, senior economist at BMO Capital Markets, notes that markets are beginning to price in fears of deflation and that the Fed is likely taking note.
“Due to tumbling oil prices and the mighty greenback, market-based measures of U.S. inflation expectations are nearing levels that have spurred unconventional easing by the Fed,” he said.