Growth Angst Infects Every Corner of the World and Bonds Love It

(Bloomberg) -- The rally in global bond markets is picking up pace as economists slash growth forecasts, spurring central banks to turn dovish.

New Zealand’s 10-year bond yield slipped as much as 6 basis points to a record low of 2.08 percent, while Australia’s benchmark declined by as much as 8 basis points. Japan’s 10-year yields fell to their lowest in five weeks, while those on German bunds are below zero all the way out to nine years. Meanwhile, benchmark Treasury yields are holding near the lowest level in a year.

Growth forecasts are getting slashed from Europe to Australia, with central banks turning dovish amid risks ranging from a Chinese slowdown to pressures in local housing markets. Risk-off sentiment also swept Asian equity markets Friday ahead of U.S.-China trade talks next week, as uncertainty grew over a resolution before the end of a deadline for further tariffs.

“Pretty much every central bank is now talking about global downside risks, and that’s helped bonds rally,” said Tano Pelosi, portfolio manager at Antares Capital in Sydney, who helps oversee the equivalent of $21 billion. “No matter where you look -- Carney to RBNZ to the RBA, at best there’s a neutral bias.”

New Zealand and Australia have led growth concerns in Asia this week, with the nations’ currencies both sliding more than 2 percent. The Reserve Bank of Australia shifted to a neutral policy outlook on Wednesday, and slashed its growth forecasts on Friday.

That in turn has intensified anticipation over the Reserve Bank of New Zealand’s quarterly monetary-policy statement due Feb. 13. A bigger-than-forecast increase in the nation’s fourth-quarter jobless rate added to a slide of more than 70 basis points in 10-year yields from a recent high in November.

Overnight index swaps signaled a 42 percent probability of RBNZ easing as early as June, and more than an even chance of an RBA rate cut this year.

Spotlight on RBNZ

“After the RBA switched to a neutral bias, expectations are high for a very dovish RBNZ next week,” said Annette Beacher, chief Asia Pacific macro strategist at TD Securities in Singapore. New Zealand’s bonds “are rich but near term likely to get richer.”

Investors have been piling into debt ever since the Federal Reserve signaled that it would pause rate hikes, citing risks to the global outlook. The European Commission on Thursday cut growth forecasts for all the euro-region’s major economies from Germany to Italy and warned that Brexit and the slowdown in China threaten to make the outlook even worse.

The yield on 10-year Treasuries fell 4 basis points on Thursday, while dropping 5 basis points for similar-maturity German bunds.

“Increasing concerns over the global economy are pushing yields down around the world," said Shinji Hiramatsu, general manager of the fixed-income department at Sompo Japan Nipponkoa Asset Management Co. “The market is especially worried about the Chinese economy, with more signs of a slowdown seen in Europe.”

Forget BOJ

Expectations for the Bank of Japan to edge toward a normalization of its monetary policy have also dimmed. Morgan Stanley pushed back its call for a BOJ rate hike to October 2020, from April this year, analysts including Takeshi Yamaguchi wrote in a report.

Japan’s 10-year bond yield dropped 2 basis points to minus 0.035 percent, its lowest since Jan. 4. In Australia, it fell 5 basis points to 2.1 percent, taking this month’s decline to 14 basis points.

Below are edited comments from investors and analysts on bonds:

Pelosi, money manager at Antares Capital:

• It’s incredible what’s happened over the past few days -- the sanguine nature that central banks showed last year has clearly now turned
• Central banks which were looking to hike have had a complete reset, and pretty much every central bank is now talking about global downside risks, and that’s helped bonds rally
• Have been adding to long positions in 10-year Australian sovereign bonds

Vivek Rajpal, rates strategist at Nomura Holdings Inc. in Singapore:

• Clearly a trend is emerging among central banks including the Fed, RBA and RBI that have turned dovish
• Recent poor round of data from Europe and downward revisions to 2019 growth forecasts from the European Commission and Bank of England have also contributed to the rally in bonds

Imre Speizer, head of New Zealand strategy at Westpac Banking Corp.:

• If RBNZ turns dovish in its quarterly monetary policy statement on Feb. 13 by lowering OCR forecast, shifting its outlook from neutral to a mild easing bias, or both, then markets will price in more than one cut
• Recommends staying long New Zealand government bonds and receiving NZD swaps for now

--With assistance from Chikafumi Hodo and Subhadip Sircar.

To contact the reporters on this story: Ruth Carson in Singapore at rliew6@bloomberg.net;Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen

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