Bloomberg/London/Sydney
The global bond market has erased its biggest monthly loss in 1-1/2 years as European leaders struggle to solve the region’s debt crisis and investors anticipate more debt purchases by the US Federal Reserve.Less than two weeks ago the Bank of America Merrill Lynch Global Broad Market Index was headed for its worst monthly performance since November 2010, losing 0.64% through August 16. It has since recovered, with fixed-income assets worldwide from government to corporate to mortgage securities returning 0.06%, including reinvested interest. Stocks have returned 2.7% when including reinvested dividends.Optimism for growth is fading as European austerity measures spur recessions from Spain to Greece while China’s expansion may be slowing for a seventh quarter. Japan cut its assessment for its economy for the first time in 10 months, and last week economists at Morgan Stanley cut their 2012 global growth forecast to 3.2% from 3.7%.“Yields rose on the back of increasing confidence in a European solution, but people have now realised that a temporary fix isn’t going to solve everything and a global slowdown is becoming inevitable,” said Mat McCrum, who helps manage A$2.7bn ($2.8bn) as investment director at Melbourne-based Omega Global Investors. “There is no clear path for global growth and a lot of downside risk.”Yields on bonds rose to an average of 1.85% on August 16 from 1.73% at the end of July before easing back to 1.74% on Monday, according to the Bank of America index, which measures almost 20,000 securities with a par value of $40.6tn.Speculation is growing that Fed chairman Ben S Bernanke may signal the central bank is ready to conduct a third round of bond purchases when he delivers a speech on Friday in Jackson Hole, Wyoming.Minutes from the July 31-August 1 meeting of the Federal Open Market Committee signalled policy makers are ready to add to record stimulus unless they are convinced the recovery is accelerating. The Fed bought $2.3tn of Treasury and mortgage-related securities since 2008 in two rounds of quantitative easing, or QE.“Global bond markets reversed course and rallied last week after the Fed signalled further easing is close at hand,” said Adam Donaldson, head of debt research at Commonwealth Bank of Australia, in a note to clients on Monday. “We look for the Fed to embark on QE3 in September, helping take US 10-year yields down toward our 1.4% target.”Benchmark 10-year US Treasury yields rose to 1.86% on August 21 from a record low of 1.379% on July 25. German bonds have slipped 0.3% this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.