Inflation angst evaporates in race for returns

Fri May 3, 2013 8:06am EDT
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By Mike Dolan

LONDON (Reuters) - For all the trillions of dollars-worth in new money that central banks are printing, financial markets seem to be signaling that fears of rampant global inflation are unfounded.

Over the past month, investors have devoured virtually any fixed income securities on offer, from the U.S. Treasury to tech giant Apple, debt-laden euro sovereigns Italy or Slovenia and even debut bonds from exotic African countries like Rwanda.

With 10-year yields on lending to United States or Germany now little over 1 percent and the average coupon on high grade global corporate bonds sold so far in 2013 just 4 percent, what seems like ludicrously low 6-7 percent yields to compensate for 10-year Slovenian or Rwandan risk have been wowing the crowd.

Renaissance Capital chief economist Charles Robertson described the sheer speed of this investor dash for fixed income as "remarkable" and more evidence of a "global bond bubble".

Yet despite the underlying global growth slowdown and the demand for bonds, investors have also continued to snaffle away western blue-chip equities, where average dividend yields in the United States and Europe are between 2 and 4 percent, and are shunning income-less inflation hedges like oil and commodities.

Wall St's bellwether S&P500 index .SPX set record highs again on Thursday and European equivalents .FTEU3 clocked up 11 consecutive monthly gains in April. Oil, gold and copper prices, conversely, are down between 10-15 percent this year, with the drop in crude prices in turn acting as a powerful depressant on imported inflation rates.

By way of some explanation, Barclays economist Michael Gavin cited U.S. data going back to 1930s to say the mix of positive but weak growth and soft inflation was traditionally a boon for both equities and bonds.

"The rationale is that inflation and output tend to be weak following recessions, leaving plenty of room for expansionary monetary policy, which tends to boost equities," said Gavin. "The current environment is no different."   Continued...

A woman holds up cauliflowers at a stall inside a market in Shanghai December 9, 2011. REUTERS/Aly Song