So much for the end of the bull market in bonds. Recession worries and central-bank stimulus in Europe and Japan have given fresh life to a three-decade-long rally in global debt. Bonds worldwide are off to the best annual start since at least 1996. They’ve earned about 3.2% this quarter and added $2.1tn of market value, according to a Bank of America Merrill Lynch index that tracks securities ranging from corporate and government obligations to mortgage- backed debt.
The strength came as a surprise to bears who said the rally was on its last legs after the Federal Reserve raised interest rates for the first time in nearly a decade in December. At the start of the year, strategists predicted benchmark 10-year Treasury yields would reach 2.45% this quarter.
“The lower yields have gotten, the more reasons have piled up that yields have to stay low,” said Robert Tipp, chief investment strategist in Newark, New Jersey, for Prudential Financial’s fixed-income division, which manages $575bn. He expects the 10-year Treasury yield will end the year at 1.9%.
Government debt, the first destination for investors seeking safety, led the gains with a total return of 3.7% through March 29. Signs of slowing global economies and turbulence in stocks and currencies helped drive the demand.
After their March policy-setting meeting, Fed officials said global economic developments posed a risk to growth, and cut their projected pace of 2016 rate increases to two, from the four they forecast in December.
The Citigroup Surprise Index for the Group of 10 economies, a gauge of how data measure up to economists’ forecasts, fell to its lowest since 2013 in February as oil prices plummeted and stocks entered a bear market.
It was just the second time in seven years the MSCI All-Country World Index of shares experienced such a slide.
Other central banks stepped up efforts to stave off deflation. The European Central Bank cut rates further below zero in March, and the Bank of Japan announced negative rates in January.
As a result, investors buying some debt in those economies are in essence paying to lend.
Even so, demand for sovereign securities has been so great that more than $8tn of debt in the Bank of America global index trades with yields below zero.
“The ECB and BoJ are buying a boatload of debt,” said Jack McIntyre, a money manager in Philadelphia at Brandywine Global Investment Management, which oversees $69bn. “They’re crowding out the private sector, but that private sector is still out there and they have to put money to work.”
Benchmark Treasury yields touched their lowest since 2012 in February. Yields on bonds globally fell to 1.36% last week, from 1.75% at the end of December, Bank of America data show.
Of the five countries that performed best - Germany, the UK, Denmark, Belgium and Japan - the two-year debt of all but the UK has negative yields. That could pose a problem, Brandywine’s McIntyre said.
“If yields are going to get more negative, then you can make sense of buying negative-yielding bonds,” he said. “But I’m not sure. You don’t want to be the last man standing in that,” especially if “we’re not going into a global recession.”
He’s trimmed Treasury holdings in recent weeks, since any signs that central banks have succeeded in spurring inflation may lead to losses in long-term US debt. He’s adding corporate securities instead, for their higher yields.
The consensus on Wall Street is still for yields to rise. Ten-year Treasury yields will climb to 2.31% by the end of this year, according to the median forecast in a Bloomberg survey. That’s down from a projection of 2.78% at the end of 2015.
Investment-grade corporate bonds delivered the second-best performance across global debt markets, generating an average total return of 3.1%. Bonds of Verizon Communications logged the highest gain among investment-grade companies, returning about 7.3%, Bank of America data show.
The rally in global corporate bonds shrank the extra yield they offer over sovereign obligations to 1.47 percentage points on March 29, from 1.75 percentage points in mid-February.
With inflation in check and Fed Chair Janet Yellen saying this week the central bank will take a gradual approach to raising rates, bonds still have their proponents.
“The party continues,” said Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ US intermediary business. The company oversees $2.2tn. “The low interest-rate environment continues.”