Oliver's Insights - Are bonds in a bubble?
6 February 2012 - This note looks at whether sovereign bonds in major global countries and Australia are in a bubble and what it means for investors.The key points are as follows:
• Australian and international bonds were the best performing asset classes last year as sovereign bond yields in Australia and major global countries fell to record or generational lows.
• Bond yields are low because of low growth, low inflation, low short-term interest rates, central bank bond buying in the US and elsewhere, and safe haven demand. Since there are good fundamental explanations for low bond yields this would suggest that bonds are not in a bubble.
• However, the scope for further sharp falls in yields is limited. Bonds are also poor value with yields running well below long term sustainable levels. Unless there is a return to global crisis or recession or both, this all suggests subpar returns from sovereign bonds on a medium term basis, specifically over the next 3-5 years.
