Maturity distribution of Fed Treasury Purchase Programme (in bn USD)
The medium-term macro-economic outlook is still bond market supportive. My base case remains for an extended period of on average subdued real growth amid the ongoing private sector deleveraging and unwinding of macro-economic imbalances which promises to take several years. Real trend growth should be markedly below the experience of the past decade. Furthermore, current growth is still far away from being self-sustainable. Rather it remains dependent on the life support provided by accommodative monetary and fiscal policy. While this has helped to move back into a positive growth environment for Q3, one should not forget that the effects of the fiscal measures on growth evaporates not once the fiscal stimulus is taken away but already much sooner when the fiscal stimulus has hit its maximum level as it is the change in the size of the fiscal stimulus that is important for growth. Once the maximum level of fiscal stimulus has been reached, the effect on growth drops to 0! So overall, I expect real growth to fluctuate in between roughly -1% to +4% per quarter for several years with a low average of around 2%. Moreover and as I have written frequently, inflation pressures should remain subdued for a prolonged period of time amid ongoing credit destruction and significant excess capacity. In turn, yearly nominal growth rates are likely to average close to 3-3.5% for quite some time which should keep nominal bond yields at historically low levels for the next years.
Medium-term nominal growth is the key driver for nominal bond yields
Therefore, fundamentally as well as from the demand side I do not see a good enough reason to change my bond bullish strategic stance. Stick to strategic longs in the US and the Eurozone!