November - a hemorrhage month for bond investors
Over the past months, investment professionals have questioned whether the 30-year old bull market is heading towards an end. Undoubtedly, the month of November proved to be one of the main concerns for bond investors, as yields across the board soared pushing bond prices towards losses barely seen over the past years.
The Bloomberg Barclays Global Aggregate Total Return Index lost four per cent in November, the deepest slump since the gauge’s inception in 1990. As I said in my previous pieces, US economic figures were offering more comfort for monetary politicians to tighten their policies, in line with economic theories which imply that long periods of low interest rates will hinder the economy, with the possibly of pushing the economy towards an overheating phase.
Thus investors’ expectations before the U.S. election were in line with a December hike, but some sort of doubts still were pictured and the market was not fully pricing-in a rate hike.
Following the results which emerged as a surprise, markets commenced pricing the pre-election Trump promises of tax cuts and $1 trillion in infrastructure spending. Those pricing elements pushed inflation expectation higher and spurred investors to dump debt that was offering near-record-low yields and pile into stocks, while the US dollar spiked to levels last seen in years.
The US election outcome pushed US 10-year treasuries from yields of 1.82 per cent in the initial days of November to 2.41 per cent as at the end of the month.
The movement triggered a ripple effect also in Europe with the 10-year German Bund spiking to 0.31 per cent from 0.16 per cent as at the end of October.
In my view, the movement in the European Sovereign curve is justified as the stronger US dollar against the euro makes European monetary politicians lives much easier in re-considering their easing measures.
In November, the European long-end of the sovereign curve sold-off by just over five per cent as expectations of tighter policies mounted, in addition to a stream of a positive uptick in inflation figures (0.6 per cent as at November for the Eurozone area).
The movement in sovereign yields justifies the movement in the asset class across the board. Let's not forget that the macro aspect, among other inflationary expectations, is captured by the theoretically known risk-free rate and thus higher yields within the sovereign curve implies a higher discount rate, which in turn implies lower bond prices.
In Europe, risky bonds declined by 0.8 per cent, while understandably hard currency emerging market bonds were the worst performers for the month with a decline of 1.24 per cent.
The harsh movement in the latter was brought about by the stronger dollar against major emerging market currencies, which it turn prove to be a burden in terms of higher financing costs.
While US high yield debt managed to notably recover following the reached deal by OPEC on Wednesday to close the month lower at 0.39 per cent.
Moving forward, bond investors should consider re-aligning their portfolios and lower the duration in order to avoid the impact of higher yields going forward.
Despite not always being applicable, as markets over the past years acted to the surprise to many, theory nowadays is more applicable than ever, low duration implies lower impact on bond portfolios. That said, despite the recent downward correction, niche opportunities are now more attractive and selectively it would make sense to dip-in, cautiously and judiciously.
This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views 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. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.