UBS Global Asset Management head of global investment solutions, Curt Custard, has warned that the prevailing view that we are at the start of a long-term bond bear market could be wrong.
Custard said a number of factors could keep bond yields lower for longer. These include ageing populations, and a declining ratio of working to the rest of the population. This will increase the supply of savings, putting downward pressure on real yields. Another factor is pension funds using long-dated bonds to immunise their liabilities, while investors may be willing to accept a lower real yield if inflation remains low and stable.
Custard said that there could be policy implications both from these factors and from low interest rates. One implication that yields may “normalise” at lower levels than expected previously, while another is that equity valuations may trend higher as low discount rates persist. Custard said the current market consensus is that yields will rise, and the 10-year US sovereign bond will be at 3.25% at the end of the year. He commented: “An old investing maxim is that the market likes to cause the most pain to the most people most of the time. I guess that is another way of saying that the consensus is usually wrong.”