Bond Bites: The world turned upside down

Jonathan Gregory, Head of Fixed Income UK, shares his thoughts on what looks like a new era of financial repression. The best answer to these challenges is a very flexible approach

23 Oct 2019

Pity investors in Germany who must own government bonds. Today German 10 year bonds have an annual yield of -0.5%1 and owning them from now until maturity will give a cumulative loss of 5%. 'Invest' Euro 100,000 today and get back Euro 95,000 in 2029, before the effects of inflation.

The relationship between borrowers and lenders has been turned completely on its head! Negative yields pose a serious risk for global bond investors because of their guaranteed losses if held to maturity. How has this come about and how can investors protect themselves?

For sure, the trend of ever lower yields has been apparent in many developed markets over the last 30 years. However, this trend accelerated following the Great Financial Crisis. Many central banks bought government bonds with the explicit aim of crowding out investors into more productive areas of risk taking for the economy such as equities and corporate bonds. This was more successful in some countries than others but the Eurozone has faced a persistent uphill struggle to return growth and investment to previous trend levels. As a result the ECB has cut its deposit rate to -0.5%1 and expanded its bond buying program even as bond yields in some coun- tries fell well below zero. And the Eurozone is not alone; Japan, Switzerland, Sweden and Denmark have government bond markets with negative yields. Today fully USD14trn of the global bond universe yields less than zero.

TINA – a new era of financial repression?

Even the ECB acknowledges there are risks to the dogged pursuit of such a policy. But we seem to have reached the point of There Is No Alternative (TINA). The ECB sticks rigidly to a monetary policy dogma that lower rates must equal more spending and investment, boost the economy and lift inflation back to target. On the other hand, some Eurozone governments doggedly refuse to consider any meaningful fiscal stimulus. Ironically, TINA was once coined as the mantra of free-market neo-liberal- ism; open borders, open markets. Today it could stand for an era of state sponsored financial repression whereby investors are forced to accept a guaranteed loss in their supposedly safe cash and government bonds to help spur investment into more productive and growth friendly areas.

Stay upright. A flexible approach to investment.

Who knows if the ECB will ultimately be successful, but in our Global Dynamic Bond strategy we prefer a traditional take on the borrower/lender relationship where bondholders are paid for the investments they make! The strategy is a serious alternative for bond investors looking to diversify away from markets that offer very poor risk/return potential while maintaining a core bond allocation. It does not have a benchmark, so we can avoid bonds that are otherwise hard wired into some products because they track a typical index (remember those USD14tn of negative yielding bonds). Instead our experienced team invests in a broad range of global government, corporate, asset backed, high yield and emerging market bonds. The strategy maintains an overall investment grade quality with an emphasis on liquidity and takes a diversified approach to sector allocation. This flexible approach has served us well in the era of negative yields. Earlier this year it was voted the No.1 Global Bond Fund by Lipper.*

Challenges from the market environment

More than $14tn of negative yielding debt globally


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