Will investors continue to buy bonds at any price?

The notion of value is often discussed by fund managers but rarely followed. Despite low valuations investors will still buy assets, especially if they are being driven by new information. Take the yields on European government debt. The assumption peddled by euro officials and supported by declining inflation expectations (principally the oil price) is that you need to buy bonds at whatever level they are on offer. Value doesn’t come into it. This is also having an effect on the surrounding markets.

One market that hasn’t really joined in the move to extreme values has been the US. Strong growth and a hawkish Federal Reserve has kept yields relatively high. For the US to join the party the market needs the news that US rates will not be going up in 2015. This would put the nail in the coffin of one if the big consensus trades of 2014 – being short the front end of the US curve and there would be a big squeeze.

Paul Brain, Newton


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