Borrowing long is going strong


Craig Inches, Head of Short Rates and Cash

22 June 2017

Across our fixed income team, we see three key trends they see shaping bond markets this week:
1. Ultra-long swansong?
While investors got their heads round the launch of an Argentinian bond maturing next century (despite the country last defaulting just three years ago) borrowing long looks set to continue. Both the US and UK have been mooting the idea of issuing ultra-long government debt, with hints emerging that the UK’s Debt Management Office could print a new 60 year bond, perhaps in September. Meanwhile, US Treasury Secretary Steve Mnuchin has come out and said that any decisions to print ultra-long bonds would not be a one off occurrence.  
2. Imminent hiking? 
Bank of England Chief Economist Andy Haldane contradicted Mark Carney and spooked gilt markets a little on Wednesday when he suggested that he could see a case for paring back the additional stimulus provided last August. The two year gilt yield is now trading around its highest level all year this morning, but the longer-term picture remains, with the yield available on short-term debt still well below pre-referendum levels. In our view, any expectations of a rate hike seem premature, given the effects of continued political uncertainty on business confidence and subdued wage growth.
3. Flatter curves all round
Both in the UK and overseas, government bond markets have been singing from the same hymn sheet, with the yield available on short dated debt rising, while longer dated bond yields remain roughly unchanged. Meanwhile comments of a rather dovish tone from the European Central Bank have continued support for periphery European issuers such as Spain and Portugal.
With global bond yields still low, and demand still high, it’s perhaps understandable that governments of all stripes are looking to lock in very long-term borrowing. However, the worry of what happens when yields begin to finally rise is likely to prey on investors’ minds, particularly for those investing in more esoteric, emerging market government debt. By contrast, present weakness in short duration bonds could provide an opportunity should rumours of a rate hike fail to materialise.

Across our fixed income team, we see three key trends they see shaping bond markets this week:

1. Ultra-long swansong?

While investors got their heads round the launch of an Argentinian bond maturing next century (despite the country last defaulting just three years ago) borrowing long looks set to continue. Both the US and UK have been mooting the idea of issuing ultra-long government debt, with hints emerging that the UK’s Debt Management Office could print a new 60 year bond, perhaps in September. Meanwhile, US Treasury Secretary Steve Mnuchin has come out and said that any decisions to print ultra-long bonds would not be a one off occurrence.  

2. Imminent hiking? 

Bank of England Chief Economist Andy Haldane contradicted Mark Carney and spooked gilt markets a little on Wednesday when he suggested that he could see a case for paring back the additional stimulus provided last August. The two year gilt yield is now trading around its highest level all year this morning, but the longer-term picture remains, with the yield available on short-term debt still well below pre-referendum levels. In our view, any expectations of a rate hike seem premature, given the effects of continued political uncertainty on business confidence and subdued wage growth.

3. Flatter curves all round

Both in the UK and overseas, government bond markets have been singing from the same hymn sheet, with the yield available on short dated debt rising, while longer dated bond yields remain roughly unchanged. Meanwhile comments of a rather dovish tone from the European Central Bank have continued support for periphery European issuers such as Spain and Portugal.

With global bond yields still low, and demand still high, it’s perhaps understandable that governments of all stripes are looking to lock in very long-term borrowing. However, the worry of what happens when yields begin to finally rise is likely to prey on investors’ minds, particularly for those investing in more esoteric, emerging market government debt. By contrast, present weakness in short duration bonds could provide an opportunity should rumours of a rate hike fail to materialise.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.