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Thirty years ago, when I started my graduate program at Morgan Grenfell Asset Management, we stock kids looked down on the losers in fixed income. The bonds were boring and no one was particularly hot.
In trading them, I mean. shame on you! But little did we all know that fixed income — from government securities to corporate bonds — was about to embark on the mother of all multi-decade runs.
Stocks certainly performed great during this period as well. The MSCI World Index has risen six-fold since I bought my first stock in 1995 by filling a ticket. In the pen. Buy 10,000 Sony when you open please.
But compare the long-term chart of 10-year Treasury yields, for example, with the S&P 500, or any other bond and stock exchange. While stocks clawed their way to glory, bonds made gains in a relentless march (as yields fell).
This always got me thinking. Did the rise in stocks or bonds produce more millionaires? Stocks have superior risk-adjusted returns. But fixed income markets employ more people and are an asset class about $30 trillion larger.
In the latter case, we have huge money management companies, such as BlackRock or Pimco, which owe their fortunes to ever-lower bond yields. Or the football field-sized fixed-income trading rooms at investment banks — printing presses with rising prices.
And all the high-yield credit funds bumped into those dodgy corporate bonds that would have defaulted had borrowing costs not fallen year after year? I have friends in that game with villas in Mallorca bigger than Versailles.
Of course, the long decline in bond yields has done more than just lift fixed-income asset prices. It also boosted anything based on preparedness as debt prices fell. Hello fortunes made in private equity, venture capital and real estate.
I mention all this to explain why Recent sell-off in global bonds Very important. Ten-year government bond yields (which rise as rates fall) at 4.8 percent are the highest since 2008. Likewise, US 10-year bonds, except for a small point in 2023.
It seems like just yesterday everyone thought the trend was down again. This has been the problem for decades. Any jump in yields always raises the question: Is this the reason? Has the supertrend of ever-lower returns finally ended?
But it was never like that. If you think equity short sellers are in pain, the career graveyards are filled with fixed income managers calling the top (the bottom of returns). Even senior bonds Bill Gross It never recovered from reducing its holdings of Treasury bonds to zero in 2011.
If the best investors are so ignorant about the direction of returns, what the hell are people like you or me to do about this latest debacle? For what it's worth, here's how I think about it.
When I look at my entire investment portfolio, which remains 73 percent invested in stocks, I usually ask myself: Is the rise in bond yields a response to good news or bad news?
It seems to me that this is the right question to ask right now, because rising yields in the US are as much related to increased confidence in Donald Trump's pro-domestic agenda as it is to other factors.
In such cases, company valuations have nothing to fear from higher borrowing costs, as they will be offset by stronger revenue growth as economic activity accelerates. I hope He wrote about this mostly.
For this reason, I don't expect stock values to rise when yields also fall. I'm neutral, in other words. Hence, my outlook for US stocks remains unchanged after this week's spike in yields, and neither does Japanese stocks.
On the other hand, bond yields can rise for bad reasons. If inflation rears its head in any of its ugly forms, or because investors are concerned about a country's debt or its ability to service interest costs.
Is the UK in this camp? Many think so. I don't care either way, honestly. If Britain is okay, so is my FTSE fund. If not, and sterling breaks, the large exposure to overseas sales will isolate large British companies to some extent. And it is still cheap.
Indeed, the recent dollar break-in has helped all my money which was priced in dollars and translated into sterling. Hence the strong performance of my portfolio this week. (I'll double my money by Christmas if this keeps up!)
The pound's decline even helped my Treasury fund gain 2 percent when this environment should be detrimental. Thank God I also deliberately invested in short-term stocks, while long-term US yields are worrying everyone.
I always thought that the so-called long end of the curve was too low given the dynamism of the US economy. At the same time, I'm also confident, based on history, that if markets completely panic, the Fed will rush to my aid by lowering interest rates.
This helps disproportionately in the short term – bond prices will rise. I also take comfort in the fact that central banks have what is known as an “asymmetric reaction function” when it comes to stocks.
When stock markets jump 20 percent, policymakers are fiddling with their pens. But if it drops by a fifth, everyone starts screaming (especially the rich) and central banks cut interest rates very quickly.
So I'm happy with my portfolio no matter where this bond market volatility ends up. The biggest risk is the United Kingdom. But even here I will win if Sterling showers. That's the negative, though, so maybe a contrarian bet deserves a column next week?
The author is a former portfolio manager. Email: stuart.kirk@ft.com; tenth: @stuartkirk__
