Bonds: Lower returns expected from global bonds

Long dated government bond yields had a cyclical peak exactly a year ago. Yields on 10 year bonds reached 6.7 % in the United States and around 5.7 % in the Euro area, while in Japan yields were at 1.8%. As at mid-January 2001, yields have dropped sharply to 5.2%, 4.9% and 1.5% respectively.

As a result the return for 2000 on government bonds, boosted by capital appreciation, was a strong 7.7% as measured by the Salomon World Government Bond Index.

Global bond funds offered in New Zealand tend as a rule to be fully hedged back into NZ dollars, and on this basis the return was an even more impressive 10.3%.

Bank of New Zealand Investment Management's view is that bond market participants are overly recognising recession and deflation risks in the way they are pricing bonds at present. This is seen in the fact that yields were last at these levels in early 1999, not long after the record lows reached when fears for the world's capital markets and deflationary pressures were at their maximum.