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Thirty years ago when I started on Morgan Grenfell’s asset management graduate program, we equity kids saw losers in fixed income. Bonds were dull and no one was particularly hot.
I mean when you trade them. Shame on you! But little do we know that fixed income — from government securities to corporate bonds — is about to embark on the mother of multi-decade runs.
Indeed, stocks have performed well over the period as well. In the year Since I bought my first share in 1995 by filling up a ticket, the MSCI World Index has risen sixfold. In the pen. Please buy 10,000 soni in open space.
But compare the long-term chart of 10-year Treasury yields with the S&P 500, or any other bond and equity index. While stocks have been whipping their way to glory, bonds have enjoyed a steady rally (while yields have fallen).
This always makes me think. Have rising stocks or bonds produced more millionaires? Stocks have risk-adjusted superior returns. But fixed income markets employ more people and the asset class is over $30tn.
At the latter you have the mega-money managers like BlackRock or Pimco, whose wealth is increasingly shrinking for bond products. Or those soccer-field-sized fixed-income trading units at investment banks—printing when prices go up.
And are all high-yielding debt funds filled with corporate bonds that would go bankrupt if it weren’t for the declining borrowing costs? I have friends with more villas in Mallorca than Versailles in that game.
Indeed, the long-term decline in bond yields has done more than lift the value of fixed-income assets. It also charged anything that relied on gear when the debt was satisfied. Say hello to opportunities made in private equity, venture capital and real estate.
I bring all this up to explain why. Recent sales of international bonds It is very important. The ten-year gilt yield (which rises when prices fall) was the highest since 2008 at 4.8 percent. Similarly, U.S. 10-year notes will save for less money in 2023.
It seems like only yesterday, everyone seems to think that the trend is down again. And this has been rubbish for decades. Any product jump always prompts the question: Is this it? Is the super trend of ever-lower products finally over?
But it never was. If you think short stock sellers are waiting for the pain, the jobbers are crowded with fixed income managers (below for production). Even Bond supremo Bill Gross It has not recovered from reducing its Treasury holdings to zero in 2011.
If the best investors don’t have a clue about product direction, what should you or I, friends, do with this latest disaster? For what it’s worth, that’s how I’m thinking about it.
When I think about my overall portfolio, 73 percent of which has been invested in stocks, I often ask myself: Is the increase in bonds a response to good news or bad news?
I think that’s the right question to ask right now because high yields in the US are doing just as much as they are doing other things along with increasing confidence in Donald Trump’s domestic agenda.
In such cases, company valuations have nothing to fear from higher borrowing costs, as these are offset by strong revenue growth as economic activity accelerates. i have It has been written about this most of the time.
For that reason, I don’t expect equity values ​​to increase when yields decrease. I am independent, in other words. So after the yield hike this week, my view on US stocks has not changed, nor has it changed on Japanese stocks.
On the other hand, bond yields can increase for bad reasons. Inflation rears its head in any ugly form or because investors worry about servicing a country’s debt or interest costs.
Is the UK in this camp? Many believe. I don’t care either way, to be honest. If Britain is fine, so is my FTSE fund. If not, and when the pound cracks, the high exposure to overseas sales will somewhat protect big British companies. And they’re still cheap.
Indeed, the recent surge has helped me sell my currencies in dollars and translate them into sterling. Hence the strong performance of my portfolio this week. (If this continues I will double my money by Christmas!)
A low pound has helped my Treasury fund gain two per cent when this area could have been hurt. I’m also thankful that I’m deliberately investing in short-term securities, but US long-term yields are getting everyone worried.
I have always thought that the long end of the curve is very low in terms of the dynamics of the US economy. Meanwhile, I’m also convinced, based on history, that if markets panic completely, the Fed will rush to the rescue by lowering policy rates.
This disproportionately helps the short end – where bond prices rise. I also take comfort in the fact that central banks have what is known as an “asymmetric reaction function” when it comes to equity.
When stock markets jump 20 percent, policymakers shake their pencils. But if they fall by a fifth, everyone starts screaming (especially the rich) and central banks quickly cut rates.
So overall, I’m happy with my portfolio regardless of how this bond market swing ends. The biggest risk is the UK. But here I win if Sterling washes. The negativity is like that, though, maybe a contrarian bet is worth a column next week?
The author is a former portfolio manager. Email: stuart.kirk@ft.com; X: @stuartkirk__
