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Bonds bruised in October stay on course for best year since 2009

Wall Street’s bond-market forecasters have had to revise their forecasts repeatedly – barely halfway through the year.

Mark Lennihan/AP

Global bonds are still driving toward their best performance in seven years even after an October rout.

The Bloomberg Barclays Global Aggregate Index has returned 6.8 per cent in 2016, set for the biggest advance since 2009. The gauge is powering toward an annual gain even after a 2.8 per cent October loss that was the steepest since September 2014.

"That was really brutal for us, but if you focus on fundamentals, there's been no change," said Yusuke Ito, one of the bond investors in Tokyo at Asset Management One Co., which oversees about $477-billion (U.S.). "That is why I can still be bullish on this market." Ito said he's sticking with long-term debt in the U.S. and Australia, holding the maturities that will benefit most if yields fall.

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While the Federal Reserve considers raising interest rates and other central banks contemplate the limits to their unprecedented policy actions, slow inflation is giving investors reasons to buy bonds. A gauge of consumer prices monitored by the Fed rose 1.2 per cent in September from a year before, a U.S. report showed Monday, failing to reach the central bank's 2-per-cent target. Central banks in Japan and Australia both finished meetings by keeping policy unchanged Tuesday.

The benchmark U.S. 10-year note yield rose two basis points to 1.85 percent as of 6:45 a.m. in London, based on Bloomberg Bond Trader data. The price of the 1.5-per-cent security due in August 2026 was 96 29/32. The yield climbed to 1.88 per cent on Oct. 28, a level not seen since May.

Inflation Indicator

The difference between yields on U.S. 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, advanced to 1.76 percentage points Monday. It was the highest level in more than a year, though less than the average of 2.02 for the past decade, according data compiled by Bloomberg.

Bond market expectations for inflation worldwide were 1.39 per cent, based on Bank of America Corp. indexes that compare yields on nominal government securities to those on inflation-linked debt.

Japan's economy is in a moderate recovery, the central bank said Tuesday as it kept monetary policy unchanged and trimmed its inflation forecast. Overseas economies are also growing at a medium rate, though the pace has decelerated mainly in emerging nations, according to the central bank statement.

Goldman Sachs Group Inc. President Gary Cohn said in October the global economy shows few signs of improving, while the U.S. continues "to muddle through." Goldman Sachs is one of the 23 primary dealers that underwrite the U.S. debt.

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U.S. Growth

U.S. data last week showed the world's biggest economy grew at an annual rate of 2.9 per cent in the third quarter, the most in two years, while prices in the nation held in check. Manufacturing was little changed in October, according to a Bloomberg survey of economists before a report Tuesday. A gauge of Chinese manufacturing rose to the highest level since 2014.

U.S. 10-year yields will fall to 1.73 per cent by Dec. 31 and then climb to 2.11 per cent next year, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings. An investor who bought Tuesday would about break even if the 2017 forecast is correct, after accounting for reinvested interest payments.

Yields may keep rising, though they will have trouble pushing past about 2 per cent for the next six months, said Park Sung-jin, the Seoul-based head of investment at Mirae Asset Securities Co., which oversees $8-billion. "The tempo may be very sluggish." he said. "The global economic recovery is very tentative." Park said he's looking for higher yields outside the government bond markets, especially in buildings where payments from tenants provide income.

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