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Global Bonds Erase Worst Losses Since 2010 on Pessimism

U.S. Federal Reserve Chairman Ben S. Bernanke
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

Aug. 28 (Bloomberg) -- The global bond market has erased its biggest monthly loss in 1 1/2 years as European leaders struggle to solve the region’s debt crisis and investors anticipate more debt purchases by the U.S. Federal Reserve.

Less than two weeks ago the Bank of America Merrill Lynch Global Broad Market Index was headed for its worst monthly performance since November 2010, losing 0.64 percent through Aug. 16. It has since recovered, with fixed-income assets worldwide from government to corporate to mortgage securities returning 0.06 percent, including reinvested interest. Stocks have returned 2.7 percent when including reinvested dividends.

Optimism for growth is fading as European austerity measures spur recessions from Spain to Greece while China’s expansion may be slowing for a seventh quarter. Japan cut its assessment for its economy for the first time in 10 months, and last week economists at Morgan Stanley cut their 2012 global growth forecast to 3.2 percent from 3.7 percent.

“Yields rose on the back of increasing confidence in a European solution, but people have now realized that a temporary fix isn’t going to solve everything and a global slowdown is becoming inevitable,” said Mat McCrum, who helps manage A$2.7 billion ($2.8 billion) as investment director at Melbourne-based Omega Global Investors Pty. “There is no clear path for global growth and a lot of downside risk.”

Yield Gyrations

Yields on bonds rose to an average of 1.85 percent on Aug. 16 from 1.73 percent at the end of July before easing back to 1.74 percent yesterday, according to the Bank of America index, which measures almost 20,000 securities with a par value of $40.6 trillion.

Speculation is growing that Fed Chairman Ben S. Bernanke may signal the central bank is ready to conduct a third round of bond purchases when he delivers a speech on Aug. 31 in Jackson Hole, Wyoming.

Minutes from the July 31-Aug. 1 meeting of the Federal Open Market Committee signaled policy makers are ready to add to record stimulus unless they are convinced the recovery is accelerating. The Fed bought $2.3 trillion of Treasury and mortgage-related securities since 2008 in two rounds of quantitative easing, or QE.

Yield Target

“Global bond markets reversed course and rallied last week after the Fed signaled further easing is close at hand,” said Adam Donaldson, head of debt research at Commonwealth Bank of Australia, in a note to clients yesterday. “We look for the Fed to embark on QE3 in September, helping take U.S. 10-year yields down toward our 1.4 percent target.”

Benchmark 10-year U.S. Treasury yields rose to 1.86 percent on Aug. 21 from a record low of 1.379 percent on July 25. They fell 2 basis points to 1.64 percent at 8:52 a.m. New York time, while the rate on similar-maturity German debt fell for a fifth day, dropping 1 basis point, or 0.01 percentage point, to 1.35 percent.

German bonds have slipped 0.3 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries fell 0.8 percent, while Spanish securities gained 2.9 percent.

The global bond market has returned 4.24 percent this year, compared with 5.9 percent in 2011. Government debt has returned 3.4 percent, while corporates have gained 8.45 percent.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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