Why everyone else may panic about rising bond yields

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When I started the graduate program at Morgan Grenfell Asset Management thirty years ago, we stock kids looked down on the losers in bonds. Bonds were boring and no one was particularly hot.

When trading with it I mean. Shame on you! But we didn’t all know that fixed income – from Treasuries to corporate bonds – was about to experience the mother of all decade-long runs.

Of course, stocks also performed excellently during the reporting period. The MSCI World Index has risen sixfold since I bought my first stock on a ticket in 1995. With feather. Please buy 10,000 Sony on sale.

But compare a long-term chart of 10-year Treasury yields to, say, the S&P 500 or another bond and stock exchange. While stocks have found their way to fame, bonds have risen at a relentless pace (while yields have fallen).

That always made me think. Have rising stocks or bonds created more millionaires? Stocks offer superior risk-adjusted returns. But bond markets employ more people and the asset class is $30 trillion larger.

In the latter case, there are the mega money managers like BlackRock or Pimco, who owe their wealth to constantly falling bond yields. Or those football field-sized fixed income trading rooms at investment banks – printing presses while prices rose.

And all the high-yield credit funds stuffed with questionable corporate bonds that would have defaulted if borrowing costs hadn’t fallen year after year? I have friends in this game with villas in Mallorca that are bigger than Versailles.

Of course, the long decline in bond yields has not only led to a rise in fixed income asset prices. It also accelerated everything that relied on debt as debt became cheaper. Hello, the fortunes made in private equity, venture capital and real estate.

I mention all this to explain why the recent sell-off in global bonds is so important. Ten-year Treasury yields (which rise when prices fall) are at 4.8 percent, the highest since 2008. The same is true for 10-year U.S. Treasury bonds, except for a spike in 2023.

Just yesterday, it seems, everyone assumed that the trend was down again. And that has been the sticking point for decades. Any rise in yields has always raised the question: Is this the right one? Is the super trend of ever lower returns finally over?

If you think short-sellers of stocks are sensitive to pain, the career graveyards are full of fixed-income managers calling the top

But it never was. If you think short sellers of stocks are sensitive to pain, the career graveyards are full of fixed income managers calling the high (the low on returns). Even bond chief Bill Gross never recovered from reducing his Treasury holdings to zero in 2011.

If the best investors have no idea about the direction of returns, what the hell should people like you or me think about this recent decline? For what it’s worth, here’s how I feel about it.

When I look at my entire portfolio, which remains 73 percent invested in stocks, I usually ask myself: Is a rise in bond yields a response to good or bad news?

That seems to me to be the right question at the moment, because in the US higher yields have as much to do with increased confidence in Donald Trump’s domestic agenda as other factors.

In such cases, company valuations do not have to worry about higher borrowing costs, as these are offset by stronger sales growth as economic activity increases. I have often written about it.

For this reason, I don’t expect stock values ​​to rise when yields fall. In other words: I am neutral. Therefore, my outlook for US stocks has not changed after this week’s rise in yields, nor has it for Japanese stocks.

On the other hand, bond yields can rise for bad reasons. When inflation rises in one of its ugly forms or because investors are worried about a country’s debt levels or its ability to service its interest costs.

Is Britain in this camp? Many believe it. Honestly, I don’t care. If the UK is doing well, my FTSE fund is doing well too. If that’s not the case and the pound breaks, a heavy reliance on overseas sales will somewhat isolate large British companies. And they’re still cheap.

In fact, the recent surging US dollar has helped all of my dollar-valued and sterling-converted funds. Hence the solid performance of my portfolio this week. (I’ll double my money by Christmas if this keeps up!)

A lower pound actually helped my treasury fund gain a few percent, even though the environment was supposed to be bad. Thankfully, I’m also consciously invested in shorter-dated securities while it’s the long-term US yields that everyone is worried about.

I have always thought that the so-called long end of the curve was too low given the dynamics of the US economy. Now, based on history, I’m confident that the Fed will come to my rescue when the markets go crazy by cutting interest rates.

This benefits the short end disproportionately – bond prices there would rise. I am also comforted by the fact that central banks have a so-called “asymmetric reaction function” when it comes to stocks.

When the stock market rises 20 percent, policymakers turn their pencils. However, if they fall by a fifth, everyone starts screaming (especially the rich) and central banks cut interest rates very quickly.

So overall, I’m happy with my portfolio, regardless of where this bond market turmoil ends. The biggest risk is Great Britain. But again, I win if Sterling takes a bath. However, the negativity is so great that perhaps a contrarian bet is worth a column next week?

The author is a former portfolio manager. E-mail: [email protected]; X: @stuartkirk__