Opinion | Keep bonds on the books but it is also time to explore equities
Credit Suisse forecasts 10-year Treasury yields will move no higher than 3 per cent over the next 12 months – from 2.9 per cent currently – suggesting only a limited move higher from current levels
Reports of the death of bonds – while commonplace – are greatly exaggerated, in my view. An apparently toxic confluence of rising Treasury yields, widening credit spreads, and fears that the asset class had entered the terminal stage of the credit cycle, sparked a spate of obituaries in the press. Inevitably, investors have started to ask whether it is time to unwind holdings in their most beloved of financial assets.
I exaggerate slightly, but the prospect of an Asian investor willingly selling their bonds is almost unimaginable. Investment grade and/or high yield credit has been the mainstay of client portfolios for years, even decades. They have been the US Postal Service of financial markets. They always deliver.
In the past 21 years, for example, Asian US dollar credit – across all ratings – has delivered negative returns just three times, in 1997 (Asia Crisis), 2008 (Lehman Crisis) and 2013 (Taper Tantrum). How’s that for reliability? Moreover, over the two decades, the asset class has returned an average 7.25 per cent per year, equivalent to a cumulative return of 335 per cent. Small wonder investors have developed attachment anxieties.
But with global growth increasingly synchronised, global monetary policy apparently tightening, and inflationary fears on the rise, is it time to consign bonds to the home for aged portfolios? And is it also time to look with fresh eyes at the youthful opportunities abounding in equity markets across the world?
Well, yes and no; or more precisely, no and yes.
In my view, it’s far too soon to pension off your bonds; and – as discussed in previous columns – it is absolutely the right time start exploring equities.
