Germany’s bund market stands out with a free float of less than 10%, Japan’s share is less than 30%, while the U.S. remains above 50% and “a little higher than the GFC days,” according to Deutsche Bank. Powell’s concerns about the impact of other major markets highlight the potential that even a U.S. market that on the surface is freer than most may struggle to see yields move sustainably higher.
Bunds ‘Unique’
“From a pure market supply point of view, bunds are unique,” said Sachin Gupta, global portfolio manager at Pimco. “The pricing of bunds is driven by scarcity and abundance of cash, that comes in part from QE.” Although “asset liability managers tend to own risk-free assets in their own currency,” Gupta said the need for a risk-free asset spills over into demand “for other assets including U.S. Treasuries.”
The upshot is that even as QE winds down, a lot of the bonds across the world’s main markets will remain locked up for the foreseeable future. The four biggest central banks—those of the U.S., Europe, Japan and the U.K.—each own more than 30% of their economies’ bond markets.
Those bond markets face sustained passive demand not only from pension funds but also banks forced to hold government securities to meet regulatory safeguards boosted after the 2008 global financial crisis. There’s also a role played by foreign central banks, with the dollar, euro, yen and pound all widely held as currency reserves. Those reserves—of which some, though not all, will be held as government securities—are equal to between 7% and 28% of the four respective bond markets.
Still, there’s also the potential that inflation will stay strong enough to roil markets and send yields higher despite the savings glut. Investors will get a chance to assess inflationary pressures when the November U.S. core personal consumption expenditure index, the Fed’s preferred inflation barometer, is released on Thursday. The consensus remains that yields will move higher even as Europe and Japan act to restrain their advance.
“The risk side is to the higher side for yields,” said Stephen Miller, an investment consultant at GSFM, an arm of Canada’s CI Financial Corp. “Markets are giving Powell a tick for now on containing inflation. If we get another month or two of inflation prints above consensus then that judgment will be withdrawn.”
—With assistance from Chikako Mogi and Eric J. Weiner.
This article was provided by Bloomberg News.