Global Bond Yields In Motion

American bond investors aren't alone in taking a beating this year. Throughout the industrial world, 10-year government yields are now from about 35% to 60% higher than they were at the start of the year (chart). For domestic holders of such bonds, this translates into heavy losses--from close to 8% in Japan and Germany on a total-return basis, to around 10% in the U.S., Britain, and Canada, nearly 12% in France, and 17% in Australia.

A number of economists think a correction is approaching, however. For one thing, the rise in rates may slow these economies somewhat. More important, as economists at Citibank point out, inflation is unusually low "and likely to remain low" in many of the nations experiencing big rate increases.

At the very least, this lowers the risk for investors betting on a turnaround in yields. With bond rates already so high, economists at the monthly International Bank Credit Analyst figure rates would have to rise about 140 basis points over the next year before domestic purchasers of U.S., British, or French bonds lost money on a total-return basis. For Canadian and Australian bonds, the cushion is 164 and 206 basis points, respectively.

If yields move lower over the next year, of course, total investment returns will look that much fatter.

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