Columbia Threadneedle Investments: Increased issuance does not necessarily lead to higher yields

16 aug 2019

Dave Chappell, fixed income portfolio manager at Columbia Threadneedle Investments, comments on the 30-year US Treasuries falling below 2% for the first time.

Chappell: ‘Even as long-term holders of 30-year US Treasuries, we have been surprised by the pace of the yield fall. The re-flattening of the curve began after Fed Chair Jerome Powell delivered the first rate cut in over a decade. Whilst the cut was fully priced, investors were surprised by his rhetoric that the move was simply a mid-cycle adjustment, a view that we do not hold. The reaction at the long end is confirmation that we are not alone in being concerned about the growth outlook, particularly if the Fed is more reluctant to follow the market’s lead. The flattening in the curve is not unique, however. Other core bond markets have been seeking out ever lower long-term yields, driven by uncertainty around the trade spat between the US and China, faltering growth expectations, far reaching geo-political concerns, extended risk markets and a lack of confidence in the ability of central banks to hit and maintain inflation targets. Add the fact that liquidity is lower than average during the summer months and you have the conditions for exaggerated moves.

Nevertheless, our structural core bond view remains constructive. In a world of high debt and low inflation, central banks will continue to use policies once considered unconventional. There is little evidence to suggest that these actions will create the necessary conditions to spur economic growth and inflation to sustainable levels where debt can be addressed. If anything, fiscal slippage becomes more palatable as yields fall and inflation does not rise, and as proved in the last year, increased issuance does not necessarily lead to higher yields.’