There is a widespread assumption that bond yields cannot go much higher and, over the medium-term, are likely to fall. As a result, long duration positions in G7 government treasuries have become commonplace as investors bet on rising bond prices. But while there is some evidence to suggest that growth and inflation have reached their peak for this cycle, the picture is far from a clear-cut. It remains very possible that yields will rise again before falling – and if that happens, an expensive and messy retreat from current positioning is likely.
The assumption that yields have peaked is based on the view that the global economy is at a late stage in its cycle, a slowdown is underway and that central banks are going to ease monetary policy. Last month, the IMF published a downbeat assessment in its six-monthly forecasts, lowering its 2019 global growth estimate to 3.3% from the 3.7% it had predicted in October. This would be the weakest annual growth rate since 2009, when global output was flat. As well as the IMF, the major central banks and the markets more generally also seem to have become more aware of down- side risks lately, including the US-China trade war, the prospect of a no-deal Brexit, global auto tariffs and political problems in Italy and France. The concern is that these risks could prevent a rebound from sluggish growth around year-end.
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