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Bonds have been hit by "kryptonite"

Question

Have been reading a bit on bonds and most recently an article by Nicolas Rabener on June 23rd where he argues that the "super powers" of bonds have been hit by "kryptonite" and are less likely to serve us into the future as profitable/worthwhile hedges. So is it perhaps time to look elsewhere for a low(er) risk return that actually appreciates like say unlisted infrastructure for example rather than sticking with something that seems to have had it's day? Thanks, Warren - Submitted by Warren

Answer

Hi Warren,

Bonds have been in a ‘non-traditional’ trading scenario for over 10 years now. As Central Banks around the world tried (try) to stimulate their respective economies they have ether lowered official interest rates or actually brought sovereign bond to push borrowing cost down. This has led to large capital appreciations in bond prices but has squeezed yields (which was the intended aim). This, as argued by Rabener, is leading to poorer returns for new and existing holders going forward.

However, we would point to asset allocation as a core part of any investor’s strategy and bonds (fixed interest) are a big part of asset allocations. We understand the current returns compared to historical returns are different and are likely to remain so in the medium term. But, chasing less liquid (e.g. unlisted infrastructure products) or high-risk yield products (e.g. Residential Mortgage Backed Securities) comes with its own risk too and are not necessarily fulfilling the fixed interest definition. 

If we return to asset allocation idea, the returns you are eluding to are likely to come from risk assets such as equities and property, your fixed interest holding component is there to mitigate event and cyclical risk like we are experiencing now. Bonds and fixed income have never been and are not intended to be high returning assets.

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Evan Lucas
Evan Lucas
Chief Market Strategist