[EDINBURGH] From China's slowdown to potential deflation in Europe, bond investors haven't been short of reasons to seek refuge in German government securities, which are delivering returns that exceed the euro-area average by more than a percentage point this year. It may be time for a breather, according to one of the world's biggest money managers.
"We've seen a sharp rally in core government bond yields but investment-grade bond spreads have widened in general," said Mike Amey, a London-based portfolio manager at Pacific Investment Management Co., which manages US$1.4 trillion. "The investment-grade universe looks more attractive." While speculation that the European Central Bank will extend its stimulus next month to counter the threat of a downward spiral in consumer prices, the region's higher-rated securities have benefited disproportionately, pushing yields on German bonds maturing as far out as eight years below zero.
The extra yield, or spread, that investors get for holding Spanish bonds instead of similar-maturity bunds reached the highest since June this month, reflecting skepticism that central banks will boost prices and even concern that the global economy could slip into recession.
Bond bulls got more vindication Friday as data showing falling consumer prices from Germany to Spain highlighted the challenge facing ECB President Mario Draghi and his colleagues in boosting prices. German sovereign securities have returned 4 per cent this year, compared with an average 2.4 per cent gain for the euro area, while Portugal's lost 3.9 per cent, according to Bloomberg World Bond Indexes. Treasuries earned 3.4 per cent.
Germany's 10-year bunds rose for a sixth week, with the yield falling six basis points, or 0.06 percentage point, to 0.15 per cent as of the 5 p.m. London close on Friday. The 0.5 per cent security due in February 2026 rose 0.545, or 5.45 euros per 1,000-euro (S$1,541) face amount, to 103.49. The yield reached 0.13 per cent on Feb 24, the lowest since April.
The average yield on European investment-grade corporate bonds reached the highest relative to German bonds since 2012 earlier this month, according to Bank of America Corp indexes.
Gains last year pushed benchmark German 10-year yields close to zero, prompting Janus Capital's Bill Gross, who was a co-founder of Newport Beach, California-based Pimco to describe them as a "short of a lifetime." The yield climbed more than 1 percentage point in less than two months after reaching its record low 0.049 per cent in April. It resumed dropping in June, after rising into the 1 per cent to 1.25 per cent range predicted by DoubleLine Capital's Jeffrey Gundlach.
Moves in core government-bond markets may be reflecting misplaced concern that there's a recession ahead and may present an opportunity to switch to higher-yielding assets, Pimco's Amey said.
"Part of that of course is market expectations that the global economy has deteriorated and that needs to be reflected in higher spreads relative to the core rates," he said in a telephone interview. "These are relatively attractive levels for us to cautiously add to investment-grade holdings where we can and be a little bit more reluctant to focus on the pure core markets."