Despite Fed tapering, developed nations' bond prices stable

US, EUROPEAN and Japanese bond prices have been remarkably stable in the past two months despite the US Federal Reserve's decision to taper its purchases.

The table shows that 10-year bond yields are below their 2013 mid-year peaks when the Fed announced that it would reduce its bond buying programme. Moreover, yields of US and UK bonds have only fluctuated in a narrow 10 basis point range in the past six months while German bund yields have fallen by 24 basis points from 1.91 per cent in September last year to 1.67 per cent currently.

Bond bears, who have warned investors from purchasing bonds, have therefore been wrong in recent months. They had forecast that yields would rise and the prices of bonds fall. In particular, they cautioned against buying long-term bonds as the longer the life of the bond, the steeper the profit or loss. For example, on a bond with a 2 per cent coupon, a one per cent rise in yield leads to capital loss of one per cent on a bond with one year to maturity, 2.9 per cent on a three-year bond, 4.6 per cent on a five-year bond, 6.3 per cent on a seven-year bond, 8.6 per cent on a 10-year bond, 12 per cent on a 15-year bond, 15 per cent on a 20-year bond and 19.7 per cent on a 30-year bond. Similar losses did occur when bond yields jumped from their low point in 2012, but in recent months yields have slipped lower and prices risen.