Bonds set to beat stocks globally in 2015 after China falters

DEC 22, 20153:04 PM

[SINGAPORE] Bonds are poised to outperform stocks globally for a second year, the first time that has happened in more than a decade, as slowing growth in China drives demand for the safest assets.

The Global Broad Market Index of bonds from Bank of America Merrill Lynch has risen 1.3 per cent this year, while the MSCI All Country World Index of shares has slumped 3.1 per cent including reinvested dividends. In 2014, debt returned 7.8 per cent and stocks advanced 4.8 per cent. Bonds haven't outperformed equities for two straight years since 2001 and 2002 when a bubble in technology shares burst.

Benchmark Treasuries have gained this year even as the Federal Reserve raised interest rates, while Chair Janet Yellen has pledged further increases will be gradual. China's leaders signaled Monday they will take further steps to support growth including more "forceful" fiscal policy. China stung investors with a surprise devaluation of the yuan in August, sending stocks around the world tumbling.

"It's not a bright picture for the stock market," said Kim Youngsung, head of overseas investment in Seoul at the Government Employees Pension Service, which has US$12.7 billion in assets.

"We had some Chinese uncertainty. Janet Yellen mentioned that she's going to increase interest rates at a slow speed. That's giving some relief to long-term bonds."

The US 10-year note yield was little changed at 2.20 per cent as of 6.42 am. in London, according to Bloomberg Bond Trader data. The price of the 2.25 per cent security maturing in November 2025 was 100 14/32.

Ms Yellen raised the Fed's main interest rate for the first time in almost a decade last week. She told a news conference that the central bank had put itself in a position to nurture the 6 1/2-year-old expansion by increasing rates a bit now to avoid having to shift them a lot later.

In China, statements released at the end of the government's Central Economic Work Conference showed monetary policy must be more "flexible" and fiscal policy more "forceful" as leaders create "appropriate monetary conditions for structural reforms." Japanese bonds were little changed as the nation sold two- year notes at an average yield of minus 0.013 per cent, a record low.

BLOOMBERG