Bond investing has been hugely profitable with central banks like the Federal Reserve driving debt values higher for as long as anyone can remember.
And bond bulls can expect even more gains ahead as governments desperately try to stimulate economic growth with deficit spending and quantitative easing by central banks, says Albert Edwards, global strategist at Societe Generale.
“In the next recession, I see both more fiscal expansion and more QE,” he says in an Oct. 19 note obtained by Newsmax Finance. “I expect U.S. 10-year yields to converge with Japan and European yields at around minus 1 percent in the next recession.”
He says the U.S. economy is signaling recession with the drop in gross domestic income, another way of measuring the country’s output beside gross domestic product. GDI fell 0.2 percent in the second quarter from the prior period, while GDP rose 1.2 percent.
“The pronounced weakness of GDI relative to GDP might be an ominous sign, for it may well be indicating that a U.S. recession is already underway, just as it was in 2007,” he says.
The 10-year Treasury yield hit a record low of 1.36 percent in July as investors fretted over the U.K. vote to leave the European Union and bid up the price of safe-haven assets like U.S. government debt. Yields fall as bond prices rise.
The last recession started in December 2007 as the collapsing housing bubble took a toll on the broader economy. That economic contraction ended up being the worst in 80 years as unemployment jumped and major banks needed taxpayer bailouts to stay in business.
The Fed responded to the financial crisis by cutting interest rates to record lows near zero percent. It also began so-called quantitative easing, or buying trillions of dollars of government debt and mortgages to keep cash flowing through the economy.
The central bank raised its key rate by 0.25 percentage point in December, the first hike in 10 years, on signs of an improving U.S. economy.
The central bank retreated from plans for four more rate hikes in 2016 as China showed signs of slowing and oil prices fell to a 13-year low.
Edwards says the Fed's money-printing will only increase as U.S. monetary policy emulates Japan's. Asia's second-biggest economy after China has suffered four recessions in the past seven years.
Easy monetary policy means the 35-year bull market for bonds will last in accordance with his “Ice Age” thesis, which advised investors to put money into bonds and be cautious with stocks as deflationary pressures like those seen in Japan spread throughout the world.
“Japan is the template going forward as all pretense at fiscal and monetary policy rectitude will soon be thrown out of the window,” Edwards says.
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