Update Bonds: From a savings glut to a bond glut
Over the past six months, and except for 2 April when US President Donald Trump announced his tariff programme, US ten-year Treasuries have traded within a range of only 50 basis points. This is quite a narrow range given the large number of market uncertainties.
Although the underlying trend remains uncertain, due to tariffs, Trump’s threats to appoint a new Fed Chair, debt sustainability and troubling US immigration practices; markets are pricing-in an almost “Goldilocks” scenario, as incoming data confirm that we are doing just fine.
In Europe, recent data have also been broadly consistent with the June European Central Bank staff projections for resilient growth and further disinflation. That said, ongoing trade tensions pose significant downside risks to these forecasts.
Debt sustainability remains a market theme. This weekend’s Japanese Upper House election could impact the Japanese government bond market. Political parties are campaigning for more fiscal support. Negative real rates are becoming increasingly unpopular and lead to higher prices, pushing up inflation. This is one of the biggest election issues. The election can be seen as a push for wealth redistribution from the government to households, which will lead to higher government debt. Japan has undertaken this aggressively over the last 12 years, but it is lately stalled.
This populistic drive (to win elections) could impact global government bond markets, as it is part of the global movement from a savings glut to a bond glut. The hope is that these fiscal injections bring growth (as distinguished from productivity, which is the real economic motor) and limited inflation effects. The most immediate parallel is arguably with the US, where the administration is attempting a combination of trade partner repression through tariffs and real rates repression (pressuring the Fed to lower rates) to improve the US fiscal position.
Both the US and Japan are trying to reduce their long-term bond issuance, while favouring shorter-term bonds to keep the financing rolling. Now, the hope for longer-term fiscal support for growth (more globally), supports the Goldilocks economic outcome. Some investors have their doubts. We continue to favour higher quality bond selection while avoiding long-maturity bonds.