ANALYSIS-Panic averted as bonds sail gently out of decades-old bull market


* Low inflation keeps investors clinging to bonds
    * Central banks cautious over monetary tightening
    * Yield curve flattening shows doubts over future rates

    By Dhara Ranasinghe and John GeddieLONDON, June 19 (Reuters) - Almost a year after the tide
turned on an unbroken three-decade decline in world bond yields,
stubbornly low wage growth and inflation and central bank
hesitancy suggest any rise in ultra-low borrowing costs will be
far slower than many had feared.
    Yields in Europe, Japan and the United States are all up
from record lows hit a year ago as fears of deflation ebb and
the global economic expansion goes up a gear. The euro zone, for
example, is recording its best growth rates in a decade.
    But a lack of sustained consumer, wage or commodity price
pressures mean there is no urgency for much tighter monetary
policy over the longer term, even though the U.S. Federal
Reserve last week lifted rates for the second time in 2017.
    And that puts long-term debt markets back on a more
comfortable footing, even if the super-low yields of this time
last year are behind us for good.
    "We have seen the end of the secular bond market bull run,
but that doesn't necessarily mean that you transition straight
into a secular bear market," said Mark Dowding, a portfolio
manager at BlueBay Asset Management.
    U.S. 10-year yields <US10YT=RR> have retraced almost all of
the sharp rise that followed President Donald Trump's election
last November on promises of higher spending seen as likely to
boost growth and inflation in the world's biggest economy.
    In Europe, German equivalents are around 50 basis points
above a low hit in early July 2016 <DE10YT=TWEB>, but have
traded in a tight 30-40 bps range all year.
    One of the reasons is the constant demand for bonds from
pension and insurance funds, who favour fixed income investments
to better match liabilities and to 'de-risk' portfolios as
ageing workers move toward retirement.
    Data compiled by JP Morgan shows that bonds have made up
45-50 percent of the assets of G4 -- euro zone, Britain, Japan
and U.S. -- pension funds and insurance companies for the last
eight years, proving relatively insensitive to price changes.
    Combined with central bank holdings, this 'sticky money'
makes up at least 50 percent of investment into bonds globally,
private estimates suggest.
    And even some of the more speculative funds polled by
Reuters have shown no sign of giving up on what has historically
been seen as a reliable store of wealth. [nL3N1JD17I]
    Those polls show global investors -- including asset
managers and private wealth funds -- have kept their allocations
to fixed income fairly steady between 39 and 41 percent over the
past year. [ASSET/WRAP]
    The last few months appear to have given bond investors
comfort that even if yields trend higher over the next few
years, the final destination is less dismaying than it once
seemed and it may take longer to get there.
    A tell-tale sign of this in markets has been a flattening of
yield curves. That is when rising short-term rates are coupled
with falling long-term equivalents.
    Comparing the current path of monetary tightening in the
United States to previous cycles explains why investors may have
come to this conclusion.
    When the Fed last embarked on successive rate hikes over a
decade ago, it took two years to raise rates from 1 percent to
over 5 percent, with hikes at 17 consecutive meetings.
    In the current cycle, it has taken 18 months for 1
percentage point of an increase.
    Policymakers project rates will top out at around 3 percent
by late 2019 or early 2020. Yet money markets are pricing rates
no higher than 2 percent in that time.
    Investors have also seen other major central banks turn more
cautious -- with the possible exception of the Bank of England,
which is battling Brexit-induced inflation pressures.
    The European Central Bank cut its inflation forecast this
month and said it had not discussed scaling back its monetary
stimulus, dampening talk that stronger growth and easing
political risks could pave the way for policy tightening.
    The Bank of Japan last week ruled out an early exit from its
stimulus scheme. [nL3N1JD17I]
    "There are plenty of reasons why with the current
growth/inflation path and structural pressures, yields will
remain pretty subdued for some time," said Charles Diebel, head
of rates at Aviva Investors.
    "This does not mean that higher yields will not come, but
more that the transition away from emergency measures is a slow
and grinding process."

German government bond yield curve now and a month ago
Global funds hold on to bonds
 (Additional reporting by Dan Burns; Graphics by Nigel
Stephenson and John Geddie; Editing by Catherine Evans)
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