MoneyShow's Jim Jubak discusses the supply and demand outlook for bonds in 2015 and explains what that may mean for yields in the year ahead.
Global demand for bonds has outstripped global supply of bonds for five of the last seven years, according to J.P. Morgan Chase and it looks like we're going to see that again in 2015. In fact projections from J.P. Morgan Chase say we're looking at demand of about 2.4 trillion and supply of only about 2 trillion. Remember, we're talking trillions here. Some little bit of error, a few billion here, a few billion there, but anyway a lot more demand than there is supply. It makes sense because you've got a lot of worries about growth in a lot of places. You've got a lot of currencies that are falling, so people are looking for safety. A lot of this is demand for treasuries.
The supply of bonds is in fact being suppressed by the fact that you've got all this buying from the fed and the European Central Bank and the Bank of Japan, which takes bonds off of the market. The effect of all of this has been to drive interest rates really really low, because as demand for bonds goes up, bond prices go up and yields go down and it looks like we're going to see that again in 2015 on a supply demand basis, which is really kind of odd if you think about it.
We've been waiting for this cycle to crack. We've been waiting for bond prices to start to fall and bond yields to start to go up because we've had all this printing by the world central banks and how low can you go, but how low can you go seems to be longer than anyone expected. If we get another year in 2015 of lower rates that anyone expected, a move down to 1.4 or 1.2, deeper negatives in real terms for some of these things, it's a vote for safety in a global economy that worries a lot of people about growth, but again it's going to make bonds, temporarily at least, give them another good year when everybody is expecting that bonds would go exactly the opposite sooner than we expect. Now it looks later than we expect.
