The current situation on the global bond markets can be characterized as the financial repression. This is defined as the situation on the bond markets, when real bond yields to maturity, i.e. nominal yields adjusted for inflation, are negative. According to available data from the Bloomberg terminal since 2015, the average global real inflation-adjusted bond yield to maturity is indeed relatively significantly negative, currently at -1.1%.
Budget deficits and government debt as measured by the ratio of government debt to nominal GDP are record high in most countries due to the global pandemic. It follows that bond yields should be significantly higher so that market prices of government bonds reflect the real credit risk. But that doesn't happen at all. The reason is nothing more than the unprecedented quantitative easing of key central banks, which buy bonds in record volumes on the secondary market. At the same time, for the whole last year, the central banks thus printed new money worth a total of $ 9.2 trillion!
At the same time, the situation will not just improve for bond investors. Indeed, key central banks indicate that they will pursue an extremely loose monetary policy, including quantitative easing, for a very long time to come. Therefore significant growth of bond yields to maturity, respectively a significant decline in bond market prices is definitely not on the agenda.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.