Global bond yields continue their historic slide

European bond yields fell to fresh lows on Wednesday on speculation that the European Central Bank is getting closer to initiating an asset purchase program along the lines of the QE programs that the central banks of the U.S., U.K. and Japan have employed since the financial crisis began 6-7 years ago. Such thinking got a boost from a report by Bloomberg that BlackRock has been engaged by the ECB to help develop an asset-backed securities purchase program.

In the U.S., the series of QE programs begun in December 2008 has no doubt helped to reduce longer-term Treasury bond yields by 25-50 basis points from the prevailing levels in November 2008, when global markets were in the throes of financial crisis. Still, it seems natural to ask, how much lower can European bond yields fall when they are already at record lows and 175 to 250 basis points below their levels of November 2008. We admit to being at least a little flummoxed by 10-year sovereign Spain debt yielding 2.14%, some 20 basis points less than comparable Treasurys.

While U.S. economic conditions are far from ideal, they are a lot better than Europe’s, and some credit for this year’s declining Treasury yields goes to the plummeting yields on competing bonds in Europe. Thus, today’s falling rates in Europe contributed to the U.S. 10-year Treasury dropping 3 basis points to 2.36%, just 2 bps off last week’s 2.34% low for the year, where it is just a few basis points from the range that prevailed before Ben Bernanke introduced the idea of tapering in June 2013.

TIPS yields have fallen far more than nominal Treasury yields since 2008 as the Fed has largely succeeded in boosting inflation expectations, that is, defeating market fears of deflation,. By contrast with the Fed, which has seen some progress toward its 2% inflation target, the ECB has watched as Euro-zone inflation has ratcheted down to 0.4% in July. Markets will be watching for Eurostat’s flash estimate of Euro-zone inflation – due out this Friday – expecting that inflation will fall to 0.3% for the 12 months ended August.

Stock prices were little changed on Wednesday, both in the U.S. and in foreign markets. The S&P 500 managed to increase over Tuesday’s 2000.02 record high, but by just 0.1 of a point, which is to say the S&P 500 was basically unchanged for the day. The Dow managed a 15-point or 0.1% rise Wednesday, while NASDAQ retreated negligibly. In Europe, the Europe Dow and the Stoxx Europe 600 stock price indexes were up 0.1%; in Asia, smaller markets performed better than major markets did, boosting the Asia Dow to an average 0.2% increase.

U.S. stock leadership wobbled a bit on Wednesday, as utilities (+0.9%) and telecoms (+0.4%) were the only S&P 500 market sectors to increase more than 0.1%. The technology (-0.1%) and health care (0%) sectors, which have provided much of the power for the market’s late-August rally, failed to follow through today. Investors also took profits in small-cap stocks and in social media and biotech issues. Apple shares bucked Wednesday’s profit taking trend, climbing 1.2% to a new high of $102.13.

Reports/dates/facts/links to watch for over the next week:

  1. August 28: U.S. GDP, first revision of Q2 growth (4.0%); corporate profits, first estimate for Q2.
  2. August 29: U.S. personal income, spending and inflation (July); University of Michigan consumer sentiment (August final); flash Eurostat estimate of EU inflation (August).
  3. August 31: Markit/JMMA manufacturing PMI for Japan (August); Markit manufacturing PMI for China (August).
  4. September 1: Euro-zone manufacturing PMI survey for August; U.S. markets closed for Labor Day.
  5. September 2: ISM manufacturing purchasing managers’ survey (August); U.S. construction spending (July).

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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Senior Vice President – Investment Research/Economist
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