A `Thousand-Year' Bund Rally Takes Hold: A Story Told in Charts

(Bloomberg) -- The global bond market rally is continuing to break records as investors ratchet back their optimism on the economic outlook amid a cocktail of geopolitical risks.

While Treasury yields have plummeted to the lowest level since 2017, it is perhaps German debt that is shouldering the biggest burden. The yield on the nation’s 10-year securities has already dived below 0% and is close to its all-time low, spurred by investors seeking safety as global trade risks flare and Italy ramps up tensions with the European Union over its budget.

“I was pretty confident that we may not see these lows again for perhaps a thousand years given where yields have traded over the last millennium,” said Jim Reid, a strategist at Deutsche Bank AG. “I’m 2.7 basis points from being 997 years wrong,” he said, referring to the 2016 record-low bund yield.

The rally across fixed income is also spreading into market-derived expectations for where central banks will take policy next.

Wherever you look globally, traders have culled bets for interest-rate increases and are now even looking at the possibility of cuts in the next year. The Reserve Bank of Australia is set to be the first to loosen, but the Federal Reserve won’t be far behind, according to money-market pricing.

Gyrations in bonds are a gut check for investors riding the cross-asset risk rally. A measure of implied volatility derived from one-month Treasury options is outpacing its equity companion, known as the VIX, and has risen to the highest since January.

At the same time, the ability of investors to earn above-inflation interest is vanishing. The stockpile of global bonds with below-zero yields has jumped to $10.8 trillion, the highest since 2016. That’s one reason why money keeps pouring into riskier pockets of fixed income from governments in the European periphery to corporate bonds.

Also, inflation-adjusted U.S. yields have tumbled to their lowest since January 2018, underscoring the global growth angst. That’s a big deal because it’s a key gauge of financial conditions and a discount rate to determine corporate cash flows.

Traders are fleeing to the safety of longer-maturity debt, which tend to outperform when interest rates tumble. Investors on Tuesday poured another $295 million into BlackRock Inc.’s benchmark iShares 20+ Year Treasury Bond ETF, bringing its year-to-date inflow to $4 billion.

Still, income-hungry investors can potentially find solace in euro-area equities as the region’s companies dangle ever higher dividends above the yield on German debt.

--With assistance from Dani Burger and Justina Lee.

To contact the reporters on this story: John Ainger in London at jainger@bloomberg.net;Sid Verma in London at sverma100@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton, Anil Varma

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