Stocks have been falling around the world over the past two days and bonds have been surging as investors look for safer havens for their money.
The recent trend affecting the most desirable government bonds around the world has even led to the remarkable phenomenon of shorter-term German bunds slipping occasionally into negative yields, meaning investors are effectively paying the German government to own part of its debt.
US 10-year Treasuries have slipped below 2% this week. And Australia hasn’t been immune, with Australian 10-year bonds at 2.628% this morning, a record low.
The flight to the safety of bonds is being driven by continuing signs that the global economy could be weakening, the uncertainty from the fall in oil prices, and concern about Europe’s political stability.
Jonathan Sheridan, Associate Director of Fixed Income Sales at Australian bond trading company FIIG, said: “Lower oil prices are correlating highly with bond yields at the moment as the concern that a high proportion of recent US growth has been generated from the shale oil boom, and that the reduction in oil prices will curtail the US recovery.
“Additionally, there is significant expected policy divergence from the US Fed and other central banks around the world, notably Europe and Japan. Deflation in the Eurozone is looking more likely, with the follow on expectation that the ECB will launch some form of QE and send yields there even lower,” Sheridan said.
Add in the uncertainty about Greece’s political future, and whether it will remain in the Euro, and the combination “is driving the flight to safe haven assets, in particular US Treasuries and in the last few sessions, gold,” Sheridan said.
Via FIIG, here’s the chart from Bloomberg showing the record low for the Australian 10-years:
Sheridan added he had been struck by the trend in the divergence between bond and commodity markets which are reacting to signs of weak global growth, and so reducing risk, “and equities markets, which haven’t realised this yet”.