Saturday, April 29, 2006

Global Bonds Suffer Amid Rate Uncertainty

By: Jennifer Hughes
Financial Times
April 28 2006

Global bonds dropped 0.9 percent in March and 0.7 percent in April, thus yielding the worst returns in two years, when the markets were getting ready for the U.S. Federal Reserve to raise interest rates. A total of two thirds of all local and government bonds posted negative absolute returns this year. The decrease in interest rates was felt across the board: Lehman Brother’s U.S. Aggregate Bond index fell 1.2 percent year to date, Pan-Europe index fell 2.7 percent, and Asia-Pacific fell 1.3 percent year to date.

Recently, yields posted a series of four year highs in expectation of a quarter-point rate rise in May and another rise to 5.25 percent by June. Unfortunately, on Thursday, Fed chairman Ben Bernanke hinted at a looming pause in rate rises. Speculators argued about whether the pause in interest rate rises was truly a pause or an end; those arguing that interest rate rises were nearing an end were in fact correct. Some “traders are betting that rate-sensitive, short-dated yields will fall faster than longer-dated ones because they believe it will become clearer that the next move in rates will be down.”

Internationally, in Germany, Bund yields reached 4.033 percent, the first time in 18 months that it reached above 4 percent. “With eurozone inflation pushing back up and eurozone economic confidence surging, the ECB should, in theory, have all the ammunition they would need for a rate hike in May.” The UK market 10 year yields reached a high of 4.72 percent on Thursday, but went down to 4.645 percent on Friday. The fluctuation in interest rates has lead to incredible amounts of speculation regarding the future of international bond rates.

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