It is a state of fact that the gains seen within the fixed-income asset class over the past years is one of the longest streaks, undoubtedly well described as a strong bull market. Market participants have been questioning, since mid-2013, whether this bond bull market is swinging towards the bearish front. I specifically mentioned mid-2013 since it was the year of the ‘tapering tantrum’-when the US Federal Reserve (Fed) indicated that it would start winding down its accommodative monetary policies. That said, since 2013, the bond market continued to generate very attractive returns to investors.
Today, bond investors began to feel the pinch of the movement in the US yield curve, which breached new highs on stronger economic numbers, in addition to an ECB which, to date, has a clear path-a tightening stance too. In this regard, we are not surprised that sovereign and US investment grade (IG) bonds are registering negative return so far this year. The latter is down circa 2.7 percent on a year to date basis. This is why we have held an underweight stance as a house view on US sovereign and Investment Grade bonds, since the last quarter of 2017. Our stance was primarily conditioned by the fact that the US economy continued to show strong signs of economic strength, data that pushed the Fed to increase the pace of interest rate hikes. We got this right, by simply plotting an IG bond, such as Apple 2027, which has close to zero probability of default, with the US 10-yr bond; the strong correlation is strong and easily seen.
So yes, indications are quite clear, we’re heading towards higher interest rates and thus the pinch on the bond market should be more tedious going forward. That said my concern is inclined more towards investor sentiment of their immediate reaction of flocking towards protecting their capital on market movements which to us, industry practitioners, are insignificant.
Would it be rational to dump your investment if you are down 2 to 3 percent year to date? Would it be rational to do so if the same said investment over the past two years returned annualized returns of over 5 percent, with a low volatility of about 1.8 percent, when the stock market over the same 2-year period returned over 3 percent over a volatility of close to 10 percent? I would not, I would hold-on tight.
Ladies and gents, it’s all about ‘the time in the market’ and not ‘market timing.’ In terms of numbers for all the sceptics out there, if I held a high yield (HY) European fund from 2000-2018 I would have locked a return of 211 percent (6.2 percent, annualized). Likewise, if an investor held a US HY in the same period s/he would have locked a 255 percent return (annualized, 7 percent). Furthermore for those doubting whether the 2008 recession was a weight on performance, looking at the same investments and considering the period 2007 to date, the same indices would have returned 137 percent (annualized, 7.6 percent) and 124 percent (annualized, 7 percent) respectively. Aren’t those good returns? This is why I can’t understand why investors are quick to shift into panic mode when they begin to experience some form of market volatility. My take: domestically investors over the past years made easy returns primarily from Malta Government bonds, returns which were benevolent given the stimulus being put forward by major central banks.
Today that game play is over and the current market turbulence is one, which historical investors have over the past years experienced and were notably pinched, but ultimately were rewarded. Undoubtedly, the sensitivity to the movement in the yield curve will differ between IG and HY debt. However, most importantly, in the current market environment, being patient is the real cure. Hold-on tight and you’ll be rewarded-this is why the time in the market is imperative.
Disclaimer: This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
CommentsComments powered by Disqus
Do not have an account?Sign Up