Bond shortfall of $460bn seen boosting debt markets

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Susanne Walker New York

The supply of bonds worldwide will fall $460 billion (R4.9 trillion) short of demand this year, underpinning support that has confounded forecasters and sent the fixed-income market to its best start since 2003.

Debt issued by sovereign, corporate and other borrowers will decline by $600bn to a net $1.8 trillion in 2014, according to JPMorgan Chase. Demand has pushed down average bond yields to levels unseen since May last year as economies slow, borrowing is cut and central banks signal no rush to start raising interest rates.

The imbalance helps explain why forecasters got it wrong this year when predicting bond prices and yields. The market received a boost on June 5 when the European Central Bank (ECB) became the first major central bank to charge fees on deposits and unveiled other plans to support an economy threatened by deflation.

“Everybody [expected] supply to come down, but maybe it’s coming down sooner” than anticipated, said Sean Simko, who oversees $8bn at SEI Investments. “There’s a shift in sentiment from the beginning of the year when everyone expected rates to move higher.”

In the US, increased buying from retail investors, commercial banks and foreign bodies in the first quarter helped push treasury yields to the lowest levels in almost a year. Borrowing costs for the riskiest firms fell to a record low last month and yields on bonds of once-troubled nations in Europe have dropped to all-time lows.

“We’re going to be range-bound in a lower range than previously expected,” Simko said in reference to yields.

Globally, bonds returned 3.7 percent this year to June 6, the biggest year-to-date gain since 2003, the Bank of America Merrill Lynch global broad market index shows. The index fell 0.3 percent last year.

Yields on global bonds dropped to 1.76 percent on average last week, after reaching 1.7 percent on May 28, the lowest level since May last year, according to the index.

In developed countries, benchmark yields in 24 of 25 nations tracked by Bloomberg have declined this year, with those in Italy and Spain touching record lows.

ECB policymakers led by president Mario Draghi cut their deposit rate to minus 0.1 percent last week, lowered the key interest rate to a record 0.15 percent and announced measures including targeted loans known as longer-term refinancing operations. ECB staff cut all inflation forecasts to the end of 2016, seeing consumer prices rising 0.7 percent this year, compared with an earlier prediction of 1 percent.

The moves followed a first quarter when the US economy contracted 1 percent and tensions between Ukraine and Russia intensified.

Global bond funds, which are 90 percent owned by retail investors, shifted to buying $80bn a quarter in the first half of this year, after selling of $40bn a quarter in the second half of last year. – Bloomberg


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