Government bonds eked out a 1.2 percent gain for investors in 2015, compared with 8.4 percent in 2014 and an average 4.4 percent return over the past five years, according to Bank of America Merrill Lynch indexes. Yields, which move inversely to prices, are now starting to rise as the fallout from recession fades, reducing demand for the securities as a haven, and as the U.S. central bank predicts four rate increases before the year is out.
More Compensation
U.S. 10-year Treasury yields will climb to 2.75 percent by the end of 2016 from 2.25 percent as of 2 p.m. in Tokyo, according to the median forecast of 65 analysts surveyed by Bloomberg.
This may prompt investors to demand more compensation to hold other bonds, too, including those from countries such as Germany and Japan, where yields are currently being kept down by their central banks expanding the money supply through debt purchases. The average sovereign yield in Bank of America Merrill Lynch’s Global Government Index climbed to 1.1 percent, from an all-time low of 0.82 percent reached in January last year.
“Yields will rise and the Fed’s tightening will spill over into other bonds,” said David Schnautz, a London-based fixed- income strategist at Commerzbank AG in London. “At least the reduced pressure to borrow will be a nice offsetting factor. There’s also a lot of structural demand out there still and that will limit the upside for bond yields.”
U.S. Increase
In the U.S., the world’s largest debtor nation with $13.1 trillion of marketable debt obligations, the amount of government securities coming due will rise 14 percent from last year to $3.5 trillion, according to data compiled by Bloomberg. China faces the biggest percentage increase in refinancing needs in 2016, with a 41 percent jump to $254 billion.
The drop in bond redemptions across most of the world’s leading economies, plus quantitative-easing programs and subdued inflation, will continue to underpin demand for government bonds, even as higher U.S. interest rates put upward pressure on yields, according to Rabobank International.
Slower inflation boosts the appeal of the fixed payments that bonds offer. Economists surveyed by Bloomberg estimate consumer prices in developed countries rose just 0.5 percent in 2015, a fraction of the 3.5 percent increase in 2008.
Budget deficits across the developed world will shrink to an average 2.4 percent of gross domestic product this year, economists predict, from an estimated 2.6 percent in 2015 and a peak of 7.2 percent in 2009.
“The economic and policy backdrop is positive” for government bonds, said Lyn Graham-Taylor, a rates strategist at Rabobank in London. “We remain bullish.”