Oliver's Insights - The bleak outlook for government bond returns
18 March 2010 - This note looks at the return outlook for government bonds.
The key takeouts are:
- Despite fears about high levels of public debt, government bond yields in developed countries remain low on the back of low inflation, low short-term interest rates, low levels of private sector borrowing, banks buying bonds rather than lending to the private sector, and strong investor flows into US bond funds.
- While these factors may constrain government bond yields in the short term, yields are likely to rise over the medium term resulting in capital losses for investors as higher short-term interest rates are factored in, private sector borrowing recovers, and investors demand a risk premium for high public debt levels in the US, Europe and Japan.
- Government bond yields in the US, Europe and Japan are well below fair value. Australian bonds with their relatively high yields and low public debt are close to fair value. Emerging market and corporate debt are also relatively attractive.
