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October 28, 2014 at 02:57 PM
Investors are looking at the relative rather than the absolute value of bonds, the co-managers of the Osterweis Strategic Income Fund wrote in their October fixed income outlook, so prepare for lower U.S. yields as European bonds “make U.S. bonds look cheap.”
According to the October outlook for fixed income, 10-year German bonds were at an “all-time low,” falling to 0.9%.
There are three factors getting lost in investors’ demand for bonds, according to the authors. First, compared to the eurozone, the U.S. economy is in fairly good shape. Second-quarter GDP was up 4.6%, and and the consumer confidence index topped 92. (On Tuesday, the Conference Board reported that the index was 94.5 in October.)
Unemployment is falling as well — 6.1% in August, compared with 7.3% a year earlier, and with 11.5% for the eurozone in July. (The U.S. rate fell even further to 5.9% in September).
Finally, inflation is “modest,” although the authors noted that it’s not likely to stay below 2% for long considering the better-than-expected improvement in unemployment.
They argue, too, that unemployment will keep improving. They cite a retiring population and sharply reduced numbers at U.S. factories as evidence for their belief that “that the job market is closer to the point at which employers will need to increase wages to hire and keep workers.”
Osterweis encouraged Fed Chairwoman Janet Yellen to follow the example of Mark Carney, governor of the Bank of England, who called the U.K.’s current inflation environment “benign. But it will not remain benign if we do not increase interest rates prudently as the expansion progresses,” the authors quoted in their outlook.
