A bull market in bonds has existed since 1980, when the yield of the benchmark US 30-year Treasury bond reached 15%. This yield continued to fall to its current low of 2-3%. The big question on investors’ minds””has the bull move run its course?
Market wisdom states that bells won’t ring at the top or the bottom of any bull or bear market run. It would be great if they did, as we could then all just wait for the bells to ring and become millionaires. Unfortunately, life is a little more complicated than that.
The current bull market in bonds has been in existence for almost 40 years and has been the traditional “safe bet” to hedge against downturns in the stock market. For the past 10 years, following the outcome of a global policy of quantitative easing, stock markets recovered from the lows following the banking crisis of 2008. In tandem with that stock market recovery, bonds also continued their bull run. This was to be expected in an environment where central banks continued to push rates to breaking point in order to stimulate financial growth. Even though yields offered by bonds were historically low, they still provided returns greater than leaving cash in the bank.
However, the mood has changed. Now, it would appear, lenders are no longer worried about lending, and borrowers are no longer afraid to borrow. Rates of US Treasury notes and bonds are beginning to edge higher as bondholders redeem their securities in favor of higher-yielding assets.
Recent surveys have indicated that almost half of all US funds with the largest outflows are bond-related. Mutual funds have also seen a move away from bond holdings. This bond-redemption activity is also matched by European funds. And for the first time in a long time, the market volatility between stocks and bonds is positively correlated, suggesting that smart money is flowing out of bonds and into stocks.
Many bond funds have reported significant losses with their bond assets. For example, the Franklin Templeton fixed income funds reported a 2.4 billion USD loss in the first three months of 2018. Additionally, bond-based Danish pension fund ATP, which holds 123 billion USD in bond assets, saw their bond holdings drop by 1% in Q1 of 2018, after a rise of almost 30% in 2017.
Against these bond market jitters, there are still sectors that are performing well. The best sector is local currencies in emerging markets, with the worst sector being high-yield, USD-denominated funds. In Europe in 2017, bond funds were the fastest-growing asset class, with a total of 289 billion euros in new funds. Comparing this to only 10.8 billion euros in Q1 of 2018, it is clear that change is in the air.
The bond asset redemptions must be seen as a reflection of Central Bank policy to start raising interest rates in the face of inflation concerns. The positive sentiment that has given rise to these moves has encouraged investors to jump onto the equity bandwagon.
However, it may be too soon to call for a bond market swan song. The current pull-back and resultant higher yields may actually bring new money into the bond market from investors who are less convinced of an imminent economic recovery.
While the consensus view from Central Banks and “the street” is that interest rates are on the rise, there is less enthusiasm that the recession is over. There is no question about it””the economic statistics have improved. With tight labor statistics and the Federal Reserve in tightening mode, the economic forecast is looking brighter. However, other economic indicators suggest that the current period of Fed tightening may have run its course. Indeed, some commentators, such as Alex Gurevich, the maverick former head of global macro trading at JP Morgan, has suggested that the days of 4% yield on the long bond are well behind us, and that the next real bull run in bonds has yet to begin. He foretells this current economic recovery is just a “blip”, and that further world recession lies ahead.
So, is this time to jump back into bonds and snap up some bargains, particularly in emerging markets? Or have you heard the bells rings, signifying the end of one of the longest bull markets in history? This commentator suggests holding onto your bond portfolio until the long bond breaches 4%, at which point you should probably call your broker with a substantial sell order. In the meantime, this might be a great opportunity to fortify your bond holdings with purchases of non-USD-denominated bonds in emerging markets. These could fortify your bond holdings and provide some excellent returns.
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