Long-dated government bonds—maturities of 10 years or greater—have been particularly hard hit this year. This challenge is primarily due to a decrease in demand from legacy markets. Nonetheless, analysts are starting to express concern over the future of these bonds. Emerging market central banks are having to withdraw their support, after the years of QE and ZIRP.
The market for long-dated government bonds has been under acute stress at times all year long. Thomas Mathews, the head of markets for Asia-Pacific at Capital Economics, wrote about alarm over the bond market. He recently remarked that demand for these bonds “is never coming back.” This marked shift comes with significant questions regarding the sustainability of long-run yields. It’s cause for deep concern about the overall health of the bond market.
Mathews went on to discuss how central banks are moving away from their foundational precepts. They’re not supporting the longer end of the bond market like they used to. Historically, these institutions have supplied one of the most important sources of demand for government bonds throughout the curve, holding massive shares of market. But more recently, with a sharp retreat from these policies, demand has plummeted. This knowledge gap is not about to be filled, either.
“The very long end of the curve will remain volatile,” Mathews stated. He further noted that it is not likely that the institutions that have historically purchased very-long-dated government bonds will increase their buying significantly. He argues convincingly that there’s a good probability that yields on long-dated government bonds will increase once more. This increase isn’t just projected to occur, at least not for the long-term.
Global market experts are intently watching the unfolding dynamics of fiscal policy and inflationary pressures that could impact bond performance even more. Andrzej Skiba commented on the current inflation landscape, suggesting that while there are some concerning areas in this month’s inflation report, they may not be sufficient to deter more dovish members of the Federal Reserve’s committee.
“While there are some hot spots in this month’s inflation reading, it’s probably not enough to deter the doves on the committee.” – Andrzej Skiba
With investors on watch for any forthcoming monetary policy direction, the Jackson Hole Economic Symposium should prove to be a pivotal one. In particular, Skiba expects that this will be the platform that Federal Reserve Chair Jerome Powell will use to signal a need for monetary easing.
“We expect this year’s Jackson Hole meeting to offer an opportunity for Powell to again nod towards monetary easing.” – Andrzej Skiba
The consequences of these changes reach far past initial market reactions. Permanent buyers are retreating from the long-dated end of the bond market. Investors are being forced to do some soul-searching and replacing their strategies, and recalibrating their exposure to sovereign bonds. Continued market disruption may create further risk and uncertainty for investors who depend on these instruments for predictable income streams.