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29.03.2021

Monthly Agenda March 2021 - Fixed Income

Bond traders are anticipating a steep return to rate hikes in coming years in defiance of what the Fed keeps saying it will do. The market has a long track record of totally mispricing Fed policy, and this looks like another example.

The central bank is committed to allowing inflation to run above 2% and says it will focus on unemployment and wage growth among low-wage workers, probably the last areas of the labor market to pick up. What it adds up to is lower rates for longer.

Chart 11: Bond traders anticipate a steep return to rate hikes 

 

Enlarge Source: Bloomberg

 

 

The Bank of Canada is signalling a slowing in its bond buying next month – making it the first major central bank to do so. It’s not a cause for concern - there are reasons behind the move. The Bank of Canada has already tapered weekly purchases to a minimum of C$4b per week as it brushes up against an ownership problem - purchases are now over 40% of sovereign bonds outstanding. Stimulus will still be injected, just the rapid 4-fold run-up in its balance sheet since last March is no longer warranted. Australia and the US still have some way to go before this become a problem, particularly given the surge in supply will act as a balance.

Chart 12: Share of central bank bond ownership (% outstanding)

Enlarge Source: Bloomberg

 

 

There is one positive side-effect of the recent rise in global bond yields, the stock of bonds with a negative yield is now $4 trillion less.

Bond markets are one of the most inefficient markets in the world because there are a large number of participants who have to buy bonds for reasons other than profit maximisation. Insurance companies and defined-benefit pension plans are such examples where their priority is to match liabilities not to earn a profit. It is mostly these market participants that have driven some bond yields into negative territory.

With global government bonds now yielding 70-80bpts more, the cost of that matching activity is significantly cheaper.

Chart 13: Global stock of negative yielding bonds ($tn)

Enlarge Source: Bloomberg

 

 

Tracey McNaughton
Chief Investment Officer

 

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