The Running of the Bond Bulls

Investors are expecting even more stimulus, which hasn't proved to be effective.

Bond investors have become an increasingly curmudgeonly crew, with debt analysts trying to one-up each other with their somewhat dire forecasts for the U.S. economy. 

Morgan Stanley's head of interest-rate strategy sees yields on 10-year U.S. Treasuries heading to 1 percent, which is far below current record lows. But the folks over at Sri-Kumar Global Strategies have an even more extreme forecast: They say the benchmark rate will go to 0.9 percent, below the current rate of inflation. Why stop there? Anyone predicting negative Treasury yields?

These forecasts are bullish for bonds because debt prices rise as yields fall, but they're pretty grim when it comes to global growth. Only a world with virtually no inflation or expansion could justify investors' urge to plow their cash into assets that promise almost nothing. 

So it's not entirely surprising that the one area in which investors are optimistic is that central banks will ease monetary policies further. In fact, a record 44 percent of fund managers surveyed by Bank of America in July think fiscal policies are too tight. Two out of three investors expect some monetary easing, either through another rate cut or more asset purchases, at the next Bank of Japan meeting. About 39 percent expect helicopter money in the next 12 months, up from 27 percent in the previous month, according to the survey.

This is a rather shocking statistic. Bond buyers have spent years decrying low-rate policies that they contend fuel asset bubbles and punish savers, and now a growing number of investors see such stimulus as the only logical step forward. Not only that, but a significant portion of asset managers apparently believe that additional rounds of easing, including the increasingly popular (if ambiguous) idea of helicopter money, will have a predictable effect on markets.

This complete faith in central bank actions is misplaced. One has to look no further than the Bank of Japan to see how even the most aggressive policies can backfire. When Japan unveiled a negative-rate policy to deter banks from holding too much extra cash on their books, it was hoping to drive investors to make riskier investments to spur growth. While the nation's bond yields plummeted, its stock market also fell. At the same time, the nation's currency strengthened significantly, putting the nation at a disadvantage when it comes to exports.

Odd Response

The yen strengthened versus the dollar after Japan announced a negative-rate policy earlier this year

Source: Bloomberg

In Europe, where central bankers are aggressively buying government and corporate debt, including some lower-rated securities, investors appear to be losing some enthusiasm for paying a premium to get no income at all.  In fact, government bond yields in the region have started ticking up.

Lower Bound?

German bond yields have started to tick up, even as the ECB maintains its stimulus program

Source: Bloomberg

Meanwhile, in the U.S., the Federal Reserve keeps indicating it will raise interest rates again in the near future, and yet benchmark yields have fallen to record lows. 

Up Means Down

U.S. Treasury yields have fallen since the Federal Reserve raised rates in December

Source: Bloomberg

While the idea of helicopter money, or a more direct infusion of cash into the economy, is gaining steam, it's an ambiguous concept that has resulted in numerous notes about what such a policy would look like. Toby Nangle, co-head of global asset allocation at Columbia Threadneedle Investments, makes the good argument for how quantitative easing is effectively just another form of helicopter money. In other words, that cash dump coming from the sky has already happened. It's unclear whether a little more in a new form will really spur more inflation or growth.

Investors are clearly unnerved. They're holding the greatest proportion of their assets in cash since 2001, the Bank of America survey showed. And they recognize that they don't fully understand the dynamics at play that go into how low yields go, with analysts jiggering and rejiggering their prediction models. Even the policy makers themselves plainly don't fully understand the dynamics at play. 

Despite investors' hopes, central banks are not coming to the rescue. They're on their own in a swirl of bond unpredictability.

(Adds details of Bank of America survey in fourth paragraph to include monetary and fiscal policy expectations.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lisa Abramowicz in New York at

    To contact the editor responsible for this story:
    Daniel Niemi at

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