[Charlotte de Kerpoisson]: Hello and welcome to this podcast by BNP Paribas Wealth Management. Today the focus is global bond markets and the rising government bond yields around the world. Edmund Shing, Global Chief Investment Officer, is here to discuss the topic.
[Edmund Shing]: Are today's historically high long-term bond yields a buying opportunity? We say yes, but selectively.
At the time of recording, long-term bond yields in the U.S. have hit 5.2% for the 30-year yield, in the U.K. 5.2% for the 10-year gilt, and even over 4% for a range of 10-year eurozone bonds such as France and Italy. These are levels, together with Japan, that we have not seen in terms of long yield bonds for at least 15 or even 20 or 25 years in some cases.
So we are at new levels of bond yield that have not been seen for a very long time. And higher long-term interest rates have a number of consequences. But first, let's talk about why have they gone up?
Why are bond yields so high today? It wasn't that long ago in 2020 when long-term bond yields were at nearly zero or 1%. So why have they gone from one extreme in 2020, very low, to now today at levels we haven't seen for getting on for 20 years?
The difference here, generally speaking, when bond yields go up, it's because we have unexpected inflation and then we expect central banks to react by raising interest rates rapidly, and bond yields go up to reflect the expectations of these higher rates in time.
However, this time around, it's not really the case. Inflation expectations have actually been rather steady, so it's not the inflation rates that increased. It's rather what we call the real yield, which is the compensation that investors expect after the effect of inflation when they buy a bond, and it's this real yield that has gone up.
So you might ask yourself, why has the real yield gone up? Quite simply, because at very high levels of debt that we see countries around the world sitting at today, whether it be the U.S., Japan, U.K. or various countries in the eurozone, investors are now seeing an increasing risk that governments may either struggle to refinance this debt and that governments are not doing enough to reduce their so-called budget deficit.
The difference between annual tax revenues and government spending, there's a gap which is usually called the budget deficit when spending is above the tax revenues, and that gap is not reducing. In the case of France or the U.K. or in particular the U.S., this gap is rather wide compared to history.
In the U.S., this budget deficit gap is over 6% of GDP, which is pretty much a record outside of economic recession, and so that needs to be funded. And that needs to be funded by greater issuance of government bonds.
And with this greater issuance ahead of us, in addition to the greater issuance of corporate bonds from technology companies to finance the AI investment spending boom that we're currently seeing, all of this is leading to higher bond yields. Investors are saying we need a higher yield to compensate us for the risk that we take to lend government money.
Now, the real question for an investor today is: okay, these long-term bond yields have gone up. We can understand why they've gone up, but does this represent a good buying opportunity today?
And I would say, selectively yes, but only selectively.
Let's start with the U.S. example. In the U.S., we remain neutral on government bonds. We have not upgraded to positive. We remain neutral because we see a huge amount of bond issuance still in progress this year, and which will continue to next year.
The total of U.S. government debt has, for the first time, broken through forty trillion dollars, of which about twenty percent needs to be refinanced this year, which is about eight trillion dollars worth.
And on top of that, as I said, you also have these AI-related hyperscalers such as Google, Meta and Amazon also issuing a large number of corporate bonds to fund investment in technology. So there's a lot of issuance hitting bond markets that investors are being asked to absorb at the same time.
So in the U.S., we prefer to remain neutral. We don't think it's a particular buying opportunity yet.
In contrast, in the eurozone, so this is the core eurozone countries like Germany or the Netherlands, for instance, we do see better opportunities. We have upgraded our recommendation from neutral to positive.
So we are telling investors today that they should start to accumulate, to buy core eurozone government bonds, such as German Bunds. Why? Because we are reaching again levels we haven't seen in a long time in the eurozone.
Inflation remains under control, and growth, although modest, is actually in most countries slightly better than expected. So that should lead to slightly better tax revenues.
So we think the debt dynamics are pretty solid for most countries in the eurozone. There are some exceptions. One might raise questions about France, for instance, with a particularly wide budget deficit of over 5% this year. But in general, core eurozone is a good place to be.
And in addition to that, we believe European investment grade corporate bonds, high-quality corporate bonds yielding about 4% at the moment, are also good value. And so we remain positive on that segment as well.
So in conclusion, when we look at the bond markets today, yes, we're at levels of bond yield for long-term bonds that we have not seen for fifteen, twenty or twenty-five years. We do see opportunities in core eurozone government bonds. We see opportunities to buy also in European corporate bonds, but we are more hesitant when it comes to the U.S.
[Charlotte de Kerpoisson]: Thank you, Edmund, and thank you to our audience for listening to this podcast. Please like, share and subscribe to our weekly podcasts, and visit our website for our investment themes and research.
Goodbye.