Great News! Financial Bonds Create Record Returns!

Financial bonds are currently on track to generate their highest annual returns ever, and this robust appreciation has motivated market participants ranging from Pacific Investment Management Co. (Pimco) to DoubleLine Capital LP to predict that the four-year rally will soon come to an end.

Sharp Appreciation 

Index data provided by Bank of America Merrill Lynch indicates that debt-based financial instruments issued by major financial services firms JPMorgan Chase & Co. to HSBC Holdings Plc. are currently on track to reach an annual return of 15.4 percent, according to Bloomberg.

If these bonds perform this effectively, they will surpass the robust return of 15.2 percent that bonds generated in 2009, the media outlet reports. The aforementioned financial bonds are currently outperforming industrial notes by 4.3 percent in 2012, which is the largest spread between the two groups of assets on record.

Global Economic Threats 

Although these bonds are generating substantial returns this year, speculation has been mounting that yields have been reduced to a point where investors might be prohibited from buying the debt-based instrument, considering the risks that are currently present in the global economy, according to the news source.

Any deterioration in the euro zone fiscal crisis could aggravate the existing interconnected nature of the global banking system. Pimco is currently in the process of selling some of its financial bonds, after speculating 15 months ago that these debt-based instruments could appreciate further.

The International Monetary Fund recently lowered its economic growth predictions for emerging markets, predicting that they will expand at an average rate of 5.8 percent during the five-year period through 2016. This figure is almost 2 percent lower than the rate of growth they had during the five years before the 2009 global economic downturn.

Bond Market Future

“It’s difficult to see the catalyst for further tightening in bank spreads,” Bonnie Baha, head of global developed credit at Los Angeles-based DoubleLine, which has more than $45 billion under management, told the news source. “They’ve had a terrific run this year.”

While the bonds issued by major financial services firms have experienced robust appreciation so far in 2012, Pimco founder Bill gross has predicted that the economy will produce many years of low bond returns, estimating that the debt-based instruments will return an average of between 2 and 3 percent annually. 

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