Solid year for sovereign bonds, says report

Business | 10 Jan 2020 12:05 pm

Sovereign bonds smashed expectations in the last decade and there will be more joy for bond bulls in 2020, according to HSBC Holdings, Bloomberg reports.

“The decade of denial saw expectations of cyclical recovery often disappointed and a similarly misplaced belief in the view that bond yields would rise,” wrote Steven Major, HSBC’s global head of fixed income research, in a report by the bank yesterday. “Low-for-longer interest rates are a reality, no longer a forecast.”

Bonds had a bumper year in 2019, driving a record amount of debt into negative yield territory. At one point, a third of all investment-grade bonds had rates below 0 percent, meaning that buyers holding the securities to maturity are guaranteed to make a loss.

The rally subsided towards the end of the year, interrupted by rising appetite for riskier assets. Demand has been strong for higher-yielding and longer-dated euro-area government debt in the early auctions of 2020.

Current yield levels are above HSBC’s end-of-2020 forecasts for key government bonds, which include 1.5 percent for U.S. Treasuries and minus 60 basis points for bunds.

The bank prefers bunds over treasuries for now -- believing the recent outperformance of U.S. sovereign debt to be unsustainable -- but strategically they see a broad and sustained rally for government bonds.

“When markets price out easing expectations and anticipate higher rates, our strategy is to continue to do the opposite and position for lower yields,” said Major.

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