Rate-Tightening Over; Ultra-Low The Norm: Allianz

Andreas Utermann, Global Chief Investment Officer at Allianz Global Investors/RCM, provides his outlook for 2012. 

 Interest Rates and Bonds

Our predictions for 2011: We anticipate little movement in short rates for the major OECD economies but gradual tightening in the emerging markets. We would be very cautious towards medium to long term maturities across the world, which we feel are significantly overvalued owing to quantitative easing (QE) activity and undue risk aversion.

 “The ECB hiked interest rates twice in 2011 but has now started to back-pedal and cut rates again. US and UK interest rates have remained extremely low, whilst in emerging markets, the ongoing cycle of rate hikes has come to an end and in fact several emerging economies have recently started to cut rates.

“Looking ahead we expect rates to start to come down further in the Eurozone whilst emerging markets are likely to continue to reduce rates. In the US and UK, as well as in Japan, we expect the policy of extremely low interest rates to continue into the foreseeable future.

“While our expectations for the short end of the yield curve turned out to be reasonably correct, the long end of the yield curve has behaved differently. In the US and UK, on-going Sovereign bond purchases by the central banks in addition to weaker economic data since the spring have brought bond yields down. As we don’t anticipate a major reversal in the economic newsflow, and as the Fed and the Bank of England may continue to buy bonds again on a large scale, the downside to bond prices in both markets is clearly limited. Bond returns in both markets are likely to be at around the current redemption yield.

“In Europe, bond markets are very much driven by political developments. Admittedly, bonds in the EMU periphery very much discount potential losses. However, as long as the political uncertainty persists and economic data remains weak, we expect risk aversion to prevail. German Government Bunds are likely to remain safe haven assets for the time being.

“A ‘risk-on’ trade within the European bond markets is only likely to start once economic data starts to improve or the ECB takes a more active role in solving the debt crisis.

“Longer-term, we remain cautious on sovereign bonds at current yields. Even if nominal returns may turn out to be positive, we expect real returns - i.e. inflation adjusted - to be disappointing.”