Column: Stunned and confused enough to buy bonds: Mike Dolan

People are seen on Wall St. off the New York Stock Exchange (NYSE) in New York City, USA, March 19, 2021. REUTERS / Brendan McDermid / File Photo

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LONDON, Sept. 21 (Reuters) – With prices plunging like a stone as central bank tightening becomes excessive, bond buying may seem confusing, but perhaps this confusion itself is reason enough.

Financial markets are full of old and often contradictory adages and pearls of “wisdom”, such as being greedy when others are afraid, but also not trying to catch a falling knife.

There is a grain of truth to all of them but, mostly, they apply to different types of savers, traders or investment managers with different horizons and risk appetites.

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Right now, anyone playing bonds as a “safe” alternative to plummeting stock prices is likely to be burned as inflation and interest rates skyrocket and bond indices plummet in tandem with equities.

Exchange Traded Funds invested in US Treasuries with relatively short maturities of between 1 and 3 years are also in the red for both the third quarter and the start of the year, with ETFs in Treasuries lasting longer between 7 and 10 years that are now losing more than 15% so far in 2022.

Further hit by the dollar’s surge, foreign dollar-denominated sovereign bond indices fell nearly 24%, even worse than the year-to-date 19% reversal of the S & P500 (.SPX).

Far from portfolio buffers, these types of moves make bonds meat and drink for hedge funds.

Hedge funds playing futures markets are playing bonds as one of the “big shorts” of the year, with net bearish bets on two-year Treasuries hitting their highs in nearly 18 months last week and net short on stocks. longer-term at the latest in a year when the Federal Reserve meets this week.

Rudyard Kipling’s poetic exhortation to keep your head when everything about you is losing its – which has also become tired old investment advice – then falls to long-term wealth managers more interested in returns and returns rather than performance. price.

With higher returns, the expected annual returns over the next period have significantly improved. And while stock prices have fallen and devalued on many models, their relative value relative to bonds has not.

Bad year for bonds
Global asset returns


In their latest annual report on expected 5-year returns, Dutch investment manager Robeco describes the period ahead as “the age of confusion”.

For Robeco, markets have been disoriented by multiple recent shocks, exacerbated by a lack of understanding of inflation and changing monetary policy along with an ongoing debate over whether the so-called Great Moderation of inflation and structurally low interest rates was actually over.

This heightened uncertainty is reflected in a near-doubling of the volatility in analysts’ forecasts of 12-month global earnings estimates compared to pre-Covid levels.

But stocks remain historically expensive and arguments about the lack of alternatives are now harder to make, it is calculated.

Robeco estimates that the rise in “risk-free” government yields means that an estimated equity risk premium for a euro investor of 3% is now below the long-term average of 3.5% for the first time in 12 years of history of their annual publication.

“This is partly due to the fact that we expect a level shift in consumer volatility which guarantees a higher medium-term equity risk premium than is currently reflected by the market.”

While not exactly a clear call to buy bonds – where it still sees yields and term premia below “steady state” estimates, Robeco’s managers see them as “substantially cheaper” and have updated yield forecasts. 5-year annualized for developed economy sovereign government bonds hedged in euro bonds of 1.5 percentage points. It reduced expected equity returns by a quarter of a point.

“Major claims about paradigm shifts require a heavy burden of proof. We find insufficient evidence to conclude that we are nearing a tipping point where reflexivity leaves inflation out of control in developed economies,” Robeco concluded, while acknowledging several concurrent scenarios.

Others are more direct in choosing bonds to protect mixed investments.

Société Générale’s global asset allocation team this month updated bonds by around 5 percentage points to 33% within its multi-asset portfolios, raising US bonds to a quarter of the overall allocation, covering the additional weighting in euro as they do not want to increase an already high dollar exposure by 53% further.

“The credibility of the Federal Reserve will continue to anchor inflation expectations below 2%,” wrote the SG team. “Indeed, we believe US Treasuries are one of the rare assets that have already priced in many of the future risks.”

Confused? Nearly 4% nominal US Treasury credit yields in two years or more than 3.5% now for 10 years may just be enough to bank to rebuild the mixed 60/40 stock / bond portfolios that have taken such a hit in 2022.

As Cesar Perez Ruiz, Pictet Wealth Management’s chief investment officer, said earlier this month, 2023 could be the “revenge of the 60/40”.

Reuters survey – US Treasury yield outlook
Robeco chart on asset allocation history

The views expressed here are those of the author, a Reuters columnist.

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by Mike Dolan, Twitter: @migrationMikeD; Editing by Chizu Nomiyama

Our Standards: Thomson Reuters Trust Principles.

The views expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence and freedom from prejudice.

Mike Dolan

Thomson Reuters

Mike Dolan is Reuters Editor-at-Large for Finance & Markets and has worked as an editor, correspondent and columnist for Reuters for the past 26 years, specializing in global economics, policymaking and financial markets in the G7 and emerging economies. Mike is currently based in London but has also worked in Washington DC and Sarajevo and has followed news events from dozens of cities around the world. A graduate in economics and politics from Trinity College Dublin, Mike previously worked with Bloomberg and Euromoney and received Reuters awards for his work during the financial crisis in 2007/2008 and on frontier markets in 2010. He was a regular Reuters journalist in the ‘International New York Times between 2010 and 2015 and currently writes bi-weekly columns for Reuters on macro markets and investments.


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