In an interview on CNBC business news TV last Thursday, former Texas Republican congressman Ron Paul added that the US “will join the rest of them and go to total negative rates [joining] the $17 trillion worth of bonds’’ where current yields to maturity are less than zero. Perhaps he’s just crying wolf, and perhaps his timing is completely off, but what we do know is that the trajectory for global interest rates has been lower since 1980 in the US, and a bit later for other nations.
In last week’s Top 100 Funds issue of the Investors Chronicle, the first 12 funds listed were bond funds, the next 7 classed as wealth preservation, and the subsequent 17 equity income funds; I suggest that all 36 have bond-like aspects serving investors who are looking for steady income rather than focusing on capital appreciation: ergo, a fixed-income proxy. According to Bank of America Merrill Lynch, in the 28 consecutive weeks to 17 July this year, investors added to safe-haven bonds and mutual funds to the tune of a cumulative $254bn.
Better late than never, say I, as diversification is often a good idea. Take the chart of the front month futures contract of the long bond (US Treasury 30-year) traded on the Chicago Board of Trade. Open interest this month matched the record high of 2008 even though the price didn’t rally to a new record high – although it has tripled in 40 years. Despite the setback last fortnight, medium and long-term trends are categorically bullish for prices, bearish on yields where, among developed markets, the US has the most room to manoeuvre.
Switching to a chart of the yield of a British 30-year gilt, notice that in July it dropped below 2016’s record low to post a new low point of just 85 basis points – a guaranteed 0.85 per cent a year. Last week’s bounce has only got the yield back to 2016’s 1.18 per cent, so very much a correction (for now) rather than anything more significant. Add in Brexit and the Bank of England would do the country a great disservice by tinkering with Bank Rate.
For something eye-watering, check the yield on Switzerland’s two-year government paper. Dropping in steps, holding in bands for long periods, the yield to maturity has been negative since 2014 (record low minus 121 basis points). Stable with a mean regression of -80 since 2015, one cannot say that punitive interest rates are unsustainable or a bubble about to burst. Lower for longer…
As amazing are emerging market key rates, which have generally fallen. Of course, politics, policies and emergencies create sudden shifts along the way – think Argentina, Russia, Turkey, Greece and Co. Today I’ll focus on Brazil where the key Banco Central rate is called the Selic. Several times it veered between 19 per cent and 45 per cent in 1997 to 2000 – destroying businesses and lives along the way. In a downward trajectory since 2003, this August it was trimmed to a new record low at 6 per cent. If this is their cost of raising funds, what’s the chance of developed market sovereign bond yields rising to this level? Probably zero.
