Bonds and the end of the global savings glut
Is the “end of the global savings glut” story reflected in bond prices? Three different approaches to fair value for 10-year Treasurys suggest the answer is yes.
The real component has driven most of the recent uptrend in global bond yields. That component in turn reflects the fact that the global savings glut that drove the multi-decade bull market has crested. Three forces have produced persistent excess global savings since the GFC: fiscal austerity, U.S. deleveraging and Chinese exports. The first two have unwound, while the third may be constrained by protectionism.
Our research on the fair-value yield suggests that bond prices already reflect most of the decline in global excess savings. This is not to say we are in a savings shortage, but that there are no obvious catalysts to reverse the shift to a higher range. Investors should therefore adopt a mean-reversion duration strategy rather than place directional bets. Markets are currently discounting close to a 50% chance of a Fed hike in September. If that occurs and yields back up, we would treat it as an opportunity to add duration.
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