Global government bond markets have succumbed to a sell-off this week, as U.S. benchmark Treasury yields hit a four-year high amid bets on faster inflation and hawkish comments on growth and inflation from central bank officials in Europe.
The jump in 10-year Treasury yields was 2.73% on Jan 30, a level not seen since 2014. Tax reform, an upbeat U.S. economy along with a hawkish Fed and oil price recovery led to the sell-off in the U.S. bond market. It is expected that commodities will rule ahead and manufacturing activity will gain strength.
On the other hand, the Eurozone's economy expanded at its fastest pace for a decade in 2017. In December, the ECB beefed up its growth estimates for the Euro zone, forecasting growth of 2.3% in 2018, up from the previous estimate of 1.8%, while 2019's forecast was raised to 1.9% from 1.7%.
Plus, there are comments from the Dutch central bank governor Klaas Knot that he saw "no reason whatsoever" to endure the bank's €2.55 trillion ($3.16 trillion) quantitative easing program beyond its September deadline.
Albeit slowly, “euro-area government bonds with sub-zero yields are shrinking,” as the QE wrap-up talks by the ECB lately gave a boost to bond yields in the Euro zone (read: Volatility ETFs Advance On Rising Yields).
This scenario is totally different from what happened two years ago when massive monetary easing and record low interest rates took bond yields to a record low of below the zero percent territory in many developed countries. Then, as much as $13 trillion worth of global debt was trading with yields of less than zero, as per Reuters.
Five-year German bunds yields traded in the positive territory in recent times for the first time since 2015. And considering ECB’s likely tightening actions, the bond market situation may worsen ahead (read: ECB Meeting Puts These Euro ETFs in Focus).
As per Deutsche Bank (DE:DBKGn), “2018 will be the first year this decade that assets purchased under QE from the ECB, the U.S. Federal Reserve and the Bank of Japan will not increase relative to net government bond sales from these three regions.”
According to Mark Dowding, a portfolio manager at BlueBay Asset Management, “bond forwards are already pricing in positive short-dated German bond yields of near 20 bps in two years’ time. That is a clear indication that markets believe no European bonds will be trading with sub-zero yields by then.” He also believes that “in the course of over 12 months, the pool of bonds with a negative yield is likely to shrink in half.”
Global Bond ETFs’ Performances
iShares International Treasury Bond ETF IGOV, SPDR Barclays (LON:BARC) International Treasury Bond (AX:BWX) , iShares 1-3 Year International Treasury Bond ETF (DE:ISHG) and SPDR Barclays Capital Short Term International Treasury Bond ETF BWZ gained in the range of 11.19% to 13.73%. But now these gains may not be sustainable.
However, as global inflation is expected to be on the rise, funds like iShares Global Inflation-Linked Bond ETF GTIP should do better in the coming days. Also, PowerShares Global Short Term High Yield Bond Portfolio PGHY may be a better bet as the fund’s short duration makes it less interest-sensitive and it offers 5.38% yields annually.
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SPDR-BBC INT TR (BWX): ETF Research Reports
ISHARS-1-3Y INT (ISHG): ETF Research Reports
ISHARS-IN TB (IGOV): ETF Research Reports
SPDR-BBC ST ITB (BWZ): ETF Research Reports
PWRSH-GLB STHYB (PGHY): ETF Research Reports
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