Declining Energy Prices Raise Outlook For Global Bond Markets, Lower Inflation
NEW YORK -- Earlier this year, rising energy prices cast a shadow over global bonds. Now, slipping energy costs are brightening prospects for longer maturities, which are the most susceptible to inflation concerns.</br></br>European Government Bonds may be the chief beneficiary of this shift. The specter of rising inflation fueled by higher energy prices loomed in mid-May, when gasoline futures spiked and crude oil was trading near $29 per barrel.</br></br>But that worry "is now off the agenda," says Mike Ryan, chief fixed-income strategist at UBS PaineWebber in New York. Global bond markets "are not overly concerned right now" about inflation, he says. Against this backdrop, global inflation concerns have been exaggerated, and inflation should fall in many areas of the world by next year in delayed response to slower growth and declining factory-utilization rates, Deutsche Bank strategists expect.</br></br>"For all major yield curves," this scenario offers "positive inflation news," says Jack Malvey, chief global fixed-income strategist at Lehman Brothers in New York. In the euro zone, for instance, inflation is expected to fall to 1.8% in 2002 from 2.7% this year, Deutsche Bank estimates.</br></br>Declines in global energy prices "will certainly be welcome" at the European Central Bank and should give the ECB more elbow room to cut interest rates, says Cary Leahey, senior economist at Deutsche Bank Securities in New York.