Global Bond Yield Plunges to Record-Low 1.3% in Warning Sign

  • Bonds gain 3.6% in 2016 while stocks drop 1.5% after dividends
  • `The U.S. cannot pull up the world economy': Sumitomo

Global bond yields fell to a record, a warning sign for the worldwide economy.

The yield on the Bank of America Corp. Global Broad Market Index plunged to 1.3 percent, the lowest in almost 20 years of data. Bonds in the gauge have returned 3.6 percent in 2016, while the MSCI All Country World Index of shares has slumped 1.5 percent, including reinvested dividends. Treasuries declined, with 10-year yields climbing for the first time in three days, before minutes of the Federal Reserve’s March meeting are published.

A third of the world’s developed-market sovereign debt now has negative yields, based on Bloomberg bond indexes, after Europe and Japan cut interest rates below zero to counter deflation. Investors rushed to higher-yielding debt, fueling the global rally. Fed Chair Janet Yellen said last week the global economy presented heightened risks, prompting traders to push back calls for when the central bank will tighten policy.

“It’s just a realization that we’re stuck for a while,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “The U.S. cannot decouple, the Fed can’t raise rates until the global backdrop improves and there really isn’t any sign of that happening anytime soon.”

The Treasury 10-year note yield rose three basis points, or 0.03 percentage point, to 1.75 percent as of 11:07 a.m. in New York, based on Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 fell 1/4, or $2.50 per $1,000 face amount, to 98 28/32.

Sheridan said he’s “still constructive on Treasuries” and reckons 10-year yields may fall to about the “low-1.60s over time.” They’ve dropped from 2.27 percent at the end of last year.

Ten-year yields are 1.38 percent in the U.K., 0.12 percent in Germany and minus 0.07 percent in Japan.

‘Global Disinflation’

The U.S. is struggling with stagnant wages and manufacturing, though the world’s biggest economy is adding jobs. Japan’s economy contracted in the last quarter of 2015, while the euro zone’s barely grew. China this month cut its growth target.

“This is a sign of global disinflation,” said Hideaki Kuriki, a debt investor at Sumitomo Mitsui Trust Asset Management, which oversees $60.3 billion. “The U.S. cannot pull up the world economy. Investors have to buy U.S. Treasuries or U.K. gilts or other high-yielding, high-quality securities.”

Bond yields indicate investors expect inflation worldwide to be about 1.1 percent. The figure dropped to 0.89 percent in February, the lowest level in more than five years. The number is derived by comparing yields on nominal bonds to those on inflation-linked debt, using Bank of America indexes.

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