Why sky high bond prices have kept on rising
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welcome to this killing explains finance video this week
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this talk of the town why sky high bond prices have kept on rising and can they
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go much further
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no one knows for sure let’s take a look at some of the factors explaining the
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rising prices
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now you can talk about price or you can talk about yield some commentators talk
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about one some about the other don’t get confused
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essentially with a fixed income security there is an inverse relationship between
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the price and the overall yield so as one Rises type of this video the other
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fall you can talk about record high bond prices or record low yield you are
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talking about the same thing
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now we’re certainly seeing across let’s say the sovereign world is a government
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in the developed world issuing bonds a similar happen if you look at this chart
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is all wedding
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basically in one direction which is down and it’s been doing that for some time
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and we’ve even got to the point with some sovereign countries
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so if you’re looking at the right hand side among Switzerland Japan and so on
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where rates of actually gone negative or yields of god- quite a weird world will
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take a look at that in more detail in just a moment but the pattern for the
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time being
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things can change is clear so what’s going on now a quick yield refresher
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when I say yields are at record lows for example prices or a record-high don’t
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forget i am talking about the one on the right hand side the yield to maturity or
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the grocery games shield not just so called flat yield which is a measure of
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income
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i’m looking at the total return pre-tax both from an income and a capital gain
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or loss perspective it’s worth noting that now
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how long have they got pretty low I mean the u.s. is down . this video is being
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made on its 10-year that’s the kind of benchmark treasure if you like its
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10-year bond to one point six percent but that’s by no means the lowest and
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half that level
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the UK and then you’ve even got big established economies like Germany
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Japan’s with the issuing bonds with a negative yield and we need to take a
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quick look at that in just a moment
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demand drivers them what is pushing prices up
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forcing yields a man’s complex picture we’ve got a record low interest rates
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and bond yields as a rule of thumb and interest rates tend to attract each
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other because as interest rates go lower the fixed coupon on one of these things
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looks more attractive people buy it
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pushing the price up and the you down low inflation or even deflation
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expectations and incredibly low expectations for inflation in the
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developed world moment and in the eurozone in particular
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Japan for example we’re teetering on the brink of war into deflation falling
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prices not rising prices government action governments through quantitative
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easing and other stimulus measures are piled in to their own sovereign bond
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markets buying up big quantities driving that price pushing down the yield taking
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supply out of the market if you like and safe haven status in an uncertain world
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breaks it and so on China’s slowing down political risk from Russia and so on
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people still want to own these things so all that demand has piled into push
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prices up push yields down and this creates this will record tomorrow and if
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you like creates a kind of a couple of strange scenarios need to watch out for
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this going to interpret this world correctly one is negative rates and
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people say well surely you can’t get any further than 7 is negative racial 800 to
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stop but we’ve seen that you can get negative rates and they were confused by
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this know the mechanics are a bond can actually be issued a prized above part
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that locks the person lending money the buyer into a negative return if you like
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and in theory and in practice that means effectively you are paying a government
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to look off your money for you
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you might think we’ll surely that can’t go on but actually there is demand out
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there there are organizations with no choice but to own lots of Bones to match
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their liabilities insurance companies and pension companies for example so
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they have get buying even in this weird alice in wonderland world safe haven
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seekers you know where else they gonna put their money they’re looking for at
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least something where they know they’ll get some money back
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the default risk is incredibly low
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then you’ve got domestic investors saying well actually even with a
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negative yield provided that offers a greater return and the speed at which
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price of alling those provided you know your negative yield is above the rate of
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deflation if you want is it that way in this topsy-turvy world you’ll still make
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money in real terms and then as overseas investors you might pile into so you are
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overseas message American investors my pilot euro don’t normally the debt for
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example thinking there’s a possibility of a currency game
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even at a negative overall yield so there is still demand out there now
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this could change but that’s what’s been driving prices up and yields down now
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the other thing that turns on its head a little bit is the risk reward from a
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textbook a relationship
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in other words if you look at these three countries you’ve got grease the
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time this was shot 7.63 percent that’s a 10 year bond us at 1.57 in Germany just
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a little bit negative now up here
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yes you could say the reason that the Greek government has to offer a high
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yield is that Greece is riskier than the US and that would be a sort of a
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reasonable assumption to make
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but are we saying therefore that the u.s. is a risky economy than Germany
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no other factors have taken over if you like people are looking at you know what
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could happen to deflation in the eurozone they’re saying relatively
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speaking the chance of a rate rise in the u.s. is slightly greater and that’s
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being priced into bonds as we speak
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so have a little bit careful applying conventional textbook analysis of bond
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yield to this world we’re currently in one of the ground cover there any
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questions
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the usual place please
