Over the years some of us fixed income fund managers have had to endure much leg pulling from our colleagues that manage assets in other more ‘exciting asset classes’. Boring, dull are adjectives I‘ve heard whispered in corridors or by the coffee machine, perhaps they weren’t talking about the asset class but I prefer not to think about that. The financial crisis quietened many down for a bit as industry professionals fell over themselves in the stampede to learn about duration, convexity, the forward forward curve and other bond jargon.   

I have defended the asset class many times over my career. I have found it an extraordinarily interesting and varied part of the financial market to work in. Where else could I combine my interest in mathematics, economics, statistics, current affairs, human behaviour, debate and discussion, all with the ambition to add value to our customers’ hard earned cash?

But …and there is a but….2017 has turned out to be somewhat boring in government bonds and this is a surprise. 2017 was supposed to be full of risks; there was Trump, there is Brexit, we have had a number of elections, some haven’t even resulted in a government yet! There was the independence vote in Catalonia and the first known flight to Brussels for refuge by Senor Puigdemont. What next? The US Federal Reserve has raised interest rates and is reducing its balance sheet. The European Central Bank has tapered and the Bank of England has raised interest rates. There has been a lot to consider.

German government bonds however have sailed serenely through these events, 10-year bonds are yielding 0.36% at the time of writing, this is also the average yield over the last 12 months, the median is 0.37% and for around 75% of the year, the yield has deviated only 0.1% from this level. Not hugely exciting although quite extraordinary when you consider it.

Very exciting when compared with Japanese bonds. In Japan the central bank operates a policy of Yield Curve Control where it targets a yield of 0% for 10-year government bonds. To do this it buys an awful lot of bonds if the yield rises too much and stops buying if it falls. And now, the market has the message and 10-year yields have traded in a mere 12 basis point (0.12%) trading range all year.  The yield today is 0.03%. Again quite extraordinary.

In the US the MOVE index which measures the volatility of the US bond market is at the lowest levels in the history of the index. Only UK gilts have tried their best to cause some angst but even so, 10-year UK debt was yielding 1.33% on the first trading day of the year. At the time of writing, 10-year gilts yield 1.30%.


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