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Time for bonds to make an impact

Time for bonds to make an impact
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ARTICLE TYPE
BondTalk
TOPIC
Opinion
PUBLISHED
February 15,2024
READ TIME
4 mins
AUTHOR
Kenneth Ward
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Back
ARTICLE TYPE BondTalk
TOPIC Opinion
PUBLISHED February 15,2024
READ TIME 4 mins read
AUTHOR Kenneth Ward
SHARE

When Neil deGrasse Tyson, the well-known US astrophysicist, was offered the accolade of having an asteroid named after him he had one immediate question: was the asteroid heading for planet Earth? He was understandably worried that he might attach his name to an object that was subsequently responsible for wiping out all life as we know it. A reasonable concern.

 

As investors, we seem to be faced with similar (if not so life endangering) concerns at the moment. The ‘object’ in this case is bond markets and the concern is over which direction markets are likely to take in the remainder of this year. There is some reticence to taking a strong position, which is understandable, given the uncertainty around inflation and Central Bank decision making. What we often end up with as a result is the ‘two-handed’ economist who eloquently balances one view against another but manages to avoid reaching a conclusion. I’ve noticed that the most skilled in this manoeuvre can often manage to pull it off without their audience even noticing..

 

How is the two-handed approach working at the moment? Well, on the one hand, inflation appears to have peaked, Central Banks are on hold, and bond markets have priced-in multiple rate cuts over the course of the year. On the other hand, Central Banks have warned against calling the end of the inflation cycle too early, and indeed recent economic data calls for caution. The result is a huge amount of money sitting on the side lines waiting for clear direction.

 

Trying to determine the optimum time to invest is, of course, a fool’s errand as we all know. But for longer-term investors it also tends to miss the point. It is clear that bond yields have moved a long way in a relatively short period. Ten-year US Treasury bonds currently yield around 4.3%, a level they last reached in 2007. Ten-year UK gilts have also moved by a similar amount (they yield 4.1%). As a consequence the yields on offer in corporate bond markets have also increased significantly, with high yield leading the way.

 

Investors have acknowledged these higher yields. A strong rally in the asset class towards the end of 2023 implied that Central Banks will make multiple rate cuts throughout 2024 (at the end of December over six rate cuts were expected in the US, UK and Europe). The rally, however, has been followed by a reality check at the beginning of this year as concerns returned that inflation is not yet beaten, while Central Banks have again been quick to dampen any talk of near-term rate cuts.

 

These concerns are warranted but the fact remains that for long-term investors bond markets currently offer an excellent opportunity not only to lock-in yields at around multi-year highs but also to take advantage of strong total return potential as rates begin to fall, as they inevitably will.

 

To put minds at rest asteroid 13123 Tyson is orbiting the sun within the inner part of the asteroid belt. Planet Earth is safe for now.

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Kenneth Ward Investment Manager

Kenneth Ward, portfolio manager, is a member of the investment grade portfolio management team.

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