Government Bonds Selling Quickly as Economies Improve

June 11, 2015Bondsby EW News Desk Team

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In the wake of the 2008 Global Recession, bonds became a favorite investment. Their safe returns on investment offered those contemplating retirement the type of security that they no longer felt banks could offer after a spate of failures. This led to the unusual situation of negative yields, where bonds sold for more than their yield values simply because investors wanted a way to safeguard most of their money.

The rapid sell-off has led to a relatively enormous increase in bond yields, particularly for US Treasury Bonds, German bunds, and Japanese government debt (as bond prices fall, yields rise). It appears these same investors are returning to the stock market, as the market has seen correspondingly high increases in fresh investments. Technology and financial stocks appear to be the hottest areas of investor interest.

Much of this improvement appears to stem from encouraging news about possible resolution of the Greek financial crisis and a sense of improved health of the broader world economy. Investors in America also believe that the Federal Reserve will raise interest rates in the near future, making low interest bonds much less appealing.

Fund managers echo these sentiments, noting that bond yields may soon hit a ceiling. During the economic crisis, bonds became an ideal investment strategy for protecting liquid wealth. Yet, with economies improving and yields from other investments quickly climbing, the relatively low interest of bonds has become far less appealing.

Of course, the surge in yields could be too much of a good thing for the economy. An extended rise in bond yields could jeopardize overall economic growth in countries with popular bonds (like the US, Japan, and Germany), as it could lead to higher borrowing costs for consumers and businesses. American borrowers have already seen mortgage rates climb slowly because of this trend. The sell-off has also wiped out positive market returns on bond sales, exposing bond investors to possible capital losses. Typical bond market returns (as opposed to bond yields paid at the end of the bond's life) would include bond trading price gains and interest payments.

Still, according to Patrick Maldari, during a recent interview with the Wall Street Journal, "Yields are not going to rise sharply because it remains to be seen whether jobs growth and higher wages will translate into consumption which has been the missing link in the U.S. economy." Maldari is a money manager at Aberdeen Asset Management, which has $490.8 billion in global assets under its management.