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U.S., U.K. Bond Yields Set to `Decline Massively': Chart of the Day
Yields on U.S. and U.K. government bonds have room to “decline massively” if history is a guide, according to Dhaval Joshi, chief strategist at RAB Capital Plc.
The CHART OF THE DAY displays the differential between yields on 20-year debt and benchmark interest rates in the two countries, according to data compiled by the Federal Reserve and Bloomberg. Joshi made similar comparisons in a Sept. 3 report.
“Interest rates cannot go up meaningfully for a very long time” in either country, the report said. U.S. Treasury yields have yet to fall far enough relative to the Fed’s target rate for loans between banks to reflect this prospect, he wrote. The same holds true for yields on U.K. gilts by comparison with the Bank of England’s base rate, in his view.
The 20-year Treasury yield ended last week at 3.49 percent after declining 1.2 percentage points from this year’s high, set on April 5. Twenty-year gilts yielded 3.91 percent after falling 0.83 point from a Feb. 19 peak. The gaps between the yields and benchmark rates -- 3.24 points and 3.41 points, respectively -- were still close to 40-year highs, according to the report.
“Further purchases of bonds by central banks can only accelerate this inevitable adjustment” in yields, Joshi wrote, adding that the bull market in fixed-income securities “is far from over.”
The Fed may have to buy more debt to head off deflation, according to Joshi, who described this so-called quantitative easing as “the greatest pawn-broking scheme” ever implemented. Fed policy makers decided last month to keep the central bank’s securities holdings at $2.05 trillion by reinvesting proceeds from maturing mortgage-backed bonds into Treasuries.
(To save a copy of the chart, click here.)
To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net
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