Let the data do the talking, says Invesco Perpetual’s Edwards
Stuart Edwards, Fixed Interest Fund Manager at Invesco Perpetual, provides his outlook for global bond markets.
The approximate 120bp rise in yield on the US 10-year Treasury since early May is the largest increase since October 2010. Back then the yield rose from around 2.40% in early October to 3.75% in early February 2011.
Thereafter, core bond markets globally rallied significantly with the 10-year Treasury yield bottoming around 1.40% in mid-2012. What’s to stop a repeat of this pattern? After all, we have had plenty of false dawns over recent years whereby the markets (and central banks) have become overly exuberant over recovery prospects only to subsequently backtrack when the data takes a turn for the worse.
This time could be different. Firstly this is probably the first summer since 2008 that we haven’t had a crisis of one form or another (normally in the eurozone). This matters not only for markets but also for businesses and consumers. Stability breeds confidence. The composite balances on the manufacturing purchasing managers’ surveys are at 2-year highs in the US, eurozone and the UK and, more importantly, appear to still be on a rising trend. For the equivalent services balance in the UK you have to go back to Dec 2006 for a higher level. Consumers are also more confident whilst various lending surveys point to an improvement in credit conditions, even in peripheral countries.
This is all relative of course and the improvement in many of these statistics is from a very low base. Still, the recent data seems somewhat inconsistent with the continued efforts of central banks to try and convince markets and the public that rates will stay lower for longer. The 5-year gilt yield in the UK, for example, is up roughly 100bps over the past four months despite the Bank of England’s introduction of forward guidance over that period. In the face of stronger data, markets are clearly sceptical of central banks’ ability to talk down bond yields. Indeed, the chart below shows how the yield on the US 10-year Treasury yield has decoupled from data trends (in this case the Citigroup Economic Surprise Index). This is perhaps the clearest indication of how successful central banks have been in artificially depressing bond yields, in spite of the data.