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Central Bankers Could Trump Fixed Income Fundamentals to Keep Rates Low, According to Standish

BNY Mellon Fixed Income Manager Cites Sharp Declines in European Government Bond Yields

The actions of global central bankers and legislators may trump economic fundamentals, keeping interest rates low and affecting fixed income returns in 2013, according to the November Bond Market Observations from Standish Mellon Asset Management Company LLC, the Boston-based fixed income specialist for BNY Mellon.

The impact of policy intervention is evident in Europe, where peripheral economies such as Spain have experienced sharp declines in government bond yields as a consequence of policy intervention by the European Central Bank (ECB), the report said.

"Most major central banks in the developed markets are engaged in some form of unconventional monetary policy to counteract the fiscal drag," said Thomas Higgins, global macro strategist for Standish and author of the report. "This has resulted in low yielding sovereigns in the developed world.

Investors searching for yield are likely to be attracted to U.S. corporate high yield and emerging markets bonds, which typically offer investors significantly higher yields, Higgins said. Overall, though, Higgins said investors should expect more from bond interest payments instead of additional capital appreciation.

Higgins added that Standish expects some volatility in the coming months, which could provide buying opportunities for bond investors.

The U.S. Federal Reserve launched its third round of quantitative easing in September and has arguably been the most aggressive with its use of unconventional measures, which have had a material effect on fixed-income markets, the report said. Without this easing, Standish said studies suggest rates on the 10-year Treasury could be a full percentage point higher.