All Major Bond Markets Gain in 2015 in Face of Fed Rate Increase

From the U.S. to Greece to Japan, all major government bond markets are poised to finish 2015 with a gain even as the Federal Reserve prepares to raise interest rates. Analysts cut their forecasts for benchmark 10-year Treasury yields next year as oil plunged.

All 26 markets tracked by Bloomberg are poised to generate positive returns this year. Greek bonds led the gains with an 18 percent rally after the nation received an international bailout. Treasuries advanced 1 percent. Government securities also rose in Japan, Germany, Sweden and Switzerland, pushing yields on some maturities in those nations below zero.

While investors are preparing for the Fed to act at its meeting Dec. 15-16, a U.S. inflation rate close to zero is still driving demand for debt. Traders expect costs to rise at a rate of about 1.1 percent globally, based on the difference between nominal bonds and inflation-linked securities, known as the break-even rate. The figure has fallen from this year’s high of almost 1.5. Slowing growth in China, the world’s second-largest economy, is further reasons to seek a haven in bonds.

“The low inflation rate is one of the reasons we have a positive total return,” said Kim Youngsung, the head of overseas investment in Seoul at the Government Employees Pension Service, which has $12.7 billion in assets. “We have uncertainty about the economy for next year. Commodity prices are too low, and the slow growth of the Chinese economy” are driving demand for bonds, he said.

U.S. 10-year yields were little changed at 2.22 percent as of at 2:18 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 was 100 7/32.

The Outlier

South Africa is the outlier in the bond rally. It’s market is down 5.3 percent this year, according to the European Federation of Financial Analysts Societies, after President Jacob Zuma fired the finance minister Wednesday.

In the U.S., the yield will climb to 2.78 percent by the close of 2016, according to the median forecast in a Bloomberg survey of economists conducted Dec. 4 to Dec. 9. The figure dropped from 2.83 percent in a November survey.

Crude oil prices fell to a 6 1/2-year low this week. The U.S. consumer price index rose 0.2 percent in October from a year earlier. It has been below the Fed’s 2 percent target for inflation for more than a year.

China’s economy will grow at the slowest pace this year since 1990, based on a Bloomberg survey of economists. China and Europe both increased their monetary-stimulus programs this year, after Japan did so in October 2014.

Not Enough

The threat of a Fed interest-rate increase hasn’t been enough to curtail the world’s bond markets. The probability the Fed will increase its benchmark rate by its meeting next week is 76 percent, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

Demand for Treasuries has kept 10-year yields within 1 percentage point of the record low of 1.38 percent set in 2012.

“People are expecting low inflation, so low bond interest rates are acceptable,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has $54 billion in assets.