Bonds Set to Beat Stocks Globally in 2015 After China Falters

Investing in a Volatile High-Yield Market
  • Global bond index rises 1.3%, after gaining 7.8% in 2014
  • First two-year outperformance by bonds since 2001-2 tech slump

Bonds are poised to outperform stocks globally for a second year, the first time that has happened in more than a decade, as slowing growth in China drives demand for the safest assets.

The Global Broad Market Index of bonds from Bank of America Merrill Lynch has risen 1.3 percent this year, while the MSCI All Country World Index of shares has slumped 2.9 percent including reinvested dividends. In 2014, debt returned 7.8 percent and stocks advanced 4.8 percent. Bonds haven’t outperformed equities for two straight years since 2001 and 2002 when a bubble in technology shares burst.

Benchmark Treasuries have gained this year even as the Federal Reserve raised interest rates, while Chair Janet Yellen has pledged further increases will be gradual. China’s leaders signaled Monday they will take further steps to support growth including more “forceful” fiscal policy. China stung investors with a surprise devaluation of the yuan in August, sending stocks around the world tumbling.

“It’s not a bright picture for the stock market,” said Kim Youngsung, head of overseas investment in Seoul at the Government Employees Pension Service, which has $12.7 billion in assets. “We had some Chinese uncertainty. Janet Yellen mentioned that she’s going to increase interest rates at a slow speed. That’s giving some relief to long-term bonds.”

The U.S. 10-year note yield rose two basis points, or 0.02 percentage point, to 2.21 percent as of 9:10 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 fell 6/32, or $1.88 per $1,000 face amount, to 100 10/32.

Raising Rates

Yellen raised the Fed’s main interest rate for the first time in almost a decade last week. She told a news conference that the U.S. economy was strong enough to withstand an increase in interest rates, and that the central bank had put itself in a position to nurture the 6 1/2-year-old expansion by raising rates a bit now to avoid having to shift them a lot later.

Treasuries extended their losses as the Commerce Department reported that consumer prices excluding food and fuel rose at a faster pace than previously estimated. It revised the pace of third-quarter U.S. economic growth down to 2 percent from 2.1 percent, still higher than the 1.9 percent growth expected by economists.

In China, statements released at the end of the government’s Central Economic Work Conference showed monetary policy must be more “flexible” and fiscal policy more “forceful” as leaders create “appropriate monetary conditions for structural reforms.”

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