The Bond Market Is Being Driven By One Thing Right Now: Fear

Investors are piling into government bonds, causing yields to fall to new lows, as fears over the health of the global economy grow.

Government bonds are usually seen as a safe alternative to stocks, which react in a more volatile way to bad news. As bond prices rise due to the influx of new demand, the interest “yield” on top of them falls by a corresponding amount. The fact that investors are willing to pay rising prices for an instrument that pays them less and less is an indicator that fear is their motivating factor.

The renewed interest in government bonds comes after the IMF cut its global growth forecast again on Tuesday. In the latest edition of the World Economic Outlook, the Fund said it expected global growth to be 3.3% in 2014 — 0.4% lower than it predicted in April, and 0.1% below what it was forecasting in July. This has helped drive pessimism over the sustainability of the global economic recovery and pushed investors to seek the perceived safe haven of government debt — even though adjusting for the impact of inflation they are losing money in doing so. Conflicts in Iraq, Syria and Ukraine aren’t helping either.

The yield on the 10-year US Treasury bond fell to 2.34% from a recent high of 2.62% on September 17th as investors searched for safety once again:

Meanwhile German government bond yields flirted with Japan-like levels as the German 5-year bond matched its Japanese counterpart’s yield of 0.14%.

Germany 5-year government bond yield:

Japan 5-year government bond yield:

Investors had been hoping that the faster-growing developing world, including economic powerhouses like China, would be the drivers of the global recovery. Unfortunately, the recent downgrades have been caused by consistently disappointing growth figures coming out of these markets.

Here is the IMF’s own record of growth forecasting, showing how its expectations have declined over the last three years:

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