No one yet has made money from calling an end to 35 years of gains in world bonds, but that has not stopped investors fretting that an era of central bank largesse is drawing to a close and a seismic shift in global markets is under way.
When the biggest debt funds say prices will fall and newspaper columns warn of a bubble set to burst and wreck people’s savings, even sceptics find it hard to dismiss the latest episode of jitters as just another ill-advised attempt to call the bottom of the longest bull market in history.
Economists argue shifts in demographics and globalisation are finally turning the tide, while policy-watchers say the Bank of Japan’s commitment last week to draw a line under further yield falls is the watershed moment they have been waiting for.
But even for those bold enough to call the turn, the pace of the change in a world devoid of growth and inflation could mean years of waiting to find out if they were right.
“You can easily imagine looking back on last week in two or three years time and saying the BoJ was the start of this,” said Michael Metcalfe, head of global macro strategy at State Street.
In the world’s largest economy, the United States, yields on 10-year government bonds have steadily fallen from around 15% in the early 1980s to record lows earlier this year of 1.37%.
In Japan and Germany, yields of around 8% a couple of decades ago are now below zero — meaning demand for their debt is so high that investors are paying for the privilege of lending to these governments.
Economists at M&G say these broad trends can be explained by a population boom after the World War Two which boosted the workforce at the end of the 20th century, keeping wage inflation low and the need for savings assets like bonds high.
Since the 2008 global financial crisis, central banks have played a much more direct role in keeping yields low — slashing interest rates and spending trillions of dollars on bond-buying splurges to try and bolster a fragile economic recovery.
And over the last decade, Reuters polls show that economists have consistently overcooked their expectations for bond yields, expecting central bank efforts to nurture growth and inflation to finally pay off.
So why should Deutsche Bank’s claim that the demographic trends that have driven markets are reaching ‘inflection point’, or bond giant Pimco’s expectation that yields will rise as central banks run out of rope, carry more currency now?
Partly, it seems, these warnings come as investors are losing faith in the ability of financial assets to appreciate any more.
The latest monthly survey by Bank of America Merrill Lynch showed fund managers reckon equities and bonds combined are near their most overvalued and have ramped up their holdings of cash as a result.
Investors also get wary when terms like ‘bond bubble’ start to enter public discourse. “The more people talk about it, the more likely it becomes.
Investment decisions are made on a mixture of emotion and analysis, so it can prove self-fulfilling,” Louis Gargour, chief investment officer at LNG Capital, said.
But while some bond market veterans agree a three-decade rally may have run its course, they are not expecting a sharp turnaround.
They argue that even if the BoJ’s shift last week is a tacit acknowledgement that monetary policy is reaching limits, heavily-indebted governments have little room to take up the slack with fiscal stimulus.
And with their banks stuffed full of bonds that would be battered by a sharp rise in yields, authorities will be eager to keep inflation under control.