© Reuters. FILE PHOTO: JP Morgan Asset Management CIO Michele poses for a photo after an interview with Reuters at the company’s Tokyo office
By Saikat Chatterjee and Abhinav Ramnarayan
LONDON (Reuters) – Global bonds are in the early stages of what will be a decade-long bear market as a removal of post-crisis stimulus by the world’s major central banks pushes yields higher, a top investor told Reuters.
But Bob Michele, who heads global fixed income for JP Morgan’s investment arm, said higher bond yields would not lead to a stronger dollar because of concerns that promised U.S. fiscal stimulus measures imply more government borrowing.
“I think we’re in the early stages of a bond bear market,” Michele, who oversees some $500 billion of assets under management, said in an interview.
He said the rise in borrowing costs will not be uniform and will be “populated by periodic rallies”, but that generally speaking the market has entered a 10-year trend towards higher interest rates.
“I think we have lived in an era where central banks have distorted yields and they have done it for so long that there’s a group of people who are starting the business who don’t know anything other than distorted yields,” he added.
Led by the U.S. Federal Reserve, central banks have begun withdrawing the extraordinary stimulus they pumped into their economies following the global financial crisis a decade ago, boosting asset prices as they flooded global markets with cash.
The value of central bank asset purchases have shrunk to about a quarter of the size of what they were a year ago and by JP Morgan Asset Management’s estimates, central bank expansion will turn into contraction in the fourth quarter of this year.
“That becomes more problematic for the markets to digest,” said Michele, the asset manager’s chief investment officer for commodities, currencies and rates.
U.S. 10-year Treasury yields () rose above a key psychological level of 3 percent this week, peaking at 3.04 percent on Wednesday on concerns about rising inflation and growing borrowing by the U.S. government.
A Bank of America Merrill Lynch (NYSE:) index measuring the performance of U.S. Treasury debt has weakened 2.4 percent so far this year after gaining by more than 22 percent between Jan. 1, 2009 and Dec. 31, 2017, according to Thomson Reuters data.
While yields have since fallen back below 3 percent, they are still holding near more than four-year highs and have climbed over 60 basis points this year.
The rise has been equally eye-catching at the shorter end of the curve, causing the spread between two-year and 10-year debt, a proxy for market expectations of how the economy will perform over that time-frame, to tighten to less than 50 basis points.
As the U.S. Federal Reserve has stayed on course in raising interest rates — JP Morgan expects three more rate hikes this year — concerns have grown that the yield curve may invert, signaling a U.S. recession.
“I think the market is right in that as the Fed is raising rates, they won’t stop until there is a slowdown, and by then it will be too late because of the lag in monetary policy and they’ll have triggered the next recession,” Michele said.
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