Markets: Bonds see little light at the end of the tunnel

As the first quarter of 1997 drew to a close last week, bond investors worldwide had the same thought: thank goodness it's over.

Unless they were fearless enough to invest in Bulgarian bonds that appeared to be on the brink of default, the first three months of the year were disappointing, with robust US growth, doubts about the outlook for European monetary union and already low yields in many places depressing returns.

But few investors expect the outlook to improve in the months ahead. "I don't think it's a great story for bonds anywhere," said Ray Goodner, bond manager at American Express Financial Advisers.

Switzerland and Japan - the two countries with the lowest interest rates and bond yields - were among the best performers, as sluggish growth raised expectations that rates in the two nations will stay low.

In local currency terms, Swiss bonds returned 2 per cent in the first quarter - including price gains and interest - while Japanese bonds returned 1.4 per cent.

Compare that with the equity market, where major indexes in many European countries, including Germany, Switzerland, Sweden, Belgium and France, rose more than 10 per cent during the quarter.

In the US, bond prices fell - and yields climbed - amid signs of strong growth that finally, last week, forced the Federal Reserve to raise interest rates. US bonds posted losses of about 0.1 per cent in the quarter, meaning investors who put money into Treasuries at the start of the year only broke even.

Investors, now fretting there may be another rate increase this year, don't expect much in the way of gains in Treasuries - although some say the Fed's moves will keep inflation at bay and could ultimately help bonds.

In continental Europe, bonds rose and fell during the quarter, responding to shifting perceptions about the prospects for a timely start to monetary union.

In countries such as Spain and Italy, which are expected to have a tough time meeting the Maastricht Treaty targets, bonds fared worse. Spanish bonds returned 0.3 per cent, while Italian bonds lost 0.8 per cent. Last year, Italian bonds returned about 21 per cent and Spanish bonds about 22 per cent, placing them among the world's best performers.

In the UK, where bonds returned just 1 per cent in the first quarter, still one of the better performances in Europe, the run-up to the 1 May general election will set the tone for government bonds in the coming months. With Labour leading the Conservatives by as much as 25 percentage points in recent opinion polls, a change of government looks likely.

Bonds probably won't suffer much as a result, traders said. There's "not much difference between the two parties on economic policy", said Colin Black, a fund manager at Scottish Equitable.

Although Japanese government securities also performed well in the past three months as a rally drove yields to record lows, investors say the best is likely over.

"A 10-year bond yielding less than 2.5 per cent is certainly not interesting, so I'm not thinking of aggressively boosting my yen bond allocation," said Kikuo Shirose, a portfolio manager at Tokyo-Mitsubishi Asset Management.

Canadian bonds, which provided investors with break-even returns in the first quarter, may fare poorly if higher US rates lure investors away.

Higher rates are "going to have a severe impact on Canada bonds and the dollar" as investors abandon Canadian securities for higher-yielding US issues, said Michael Manford, chief economist with Scotia Capital Markets in Toronto.

Emerging market bonds rose 2.6 per cent in the quarter, according to JP Morgan's index, as worries about higher US interest rates put the brakes on the last quarter's brisk 14 per cent gains.

Bulgarian bonds surged 17 per cent as the country reached a loan pact with the International Monetary Fund. Russian and Ecuadorian debt fell following the ousting of Ecuador's president and Russia's arguments with the IMF over its loan programme. Copyright: IOS & Bloomberg

News
people'It can last and it's terrifying'
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
Sport
footballStriker has moved on loan for the remainder of the season
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
New Articles
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
News
The five geckos were launched into space to find out about the effects of weightlessness on the creatures’ sex lives
i100
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
ebooksAn unforgettable anthology of contemporary reportage
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
News
i100
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Arts and Entertainment
Word master: Self holds up a copy of his novel ‘Umbrella’
booksUnlike 'talented mediocrity' George Orwell, you must approach this writer dictionary in hand
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

£40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, Data Warehousi...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering