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Bonds regain some sparkle after grim reset

Every cloud has a silver lining, and all that. Yes, the government bond market is on its way to the worst year since 1865, according to the Bank of America.

“It was an overall gloomy environment,” as Andrew Bells, Pimco’s global investment director for fixed income, put it bluntly at the end of last month. “It was not a particularly enjoyable time for anyone.” enough. Sky inflation and rapidly tightening monetary policy are not a friendly mix for most asset types.

But the good news is that the ugly drop in bond prices has finally killed Tina – the mantra there is no alternative that has dominated the financial markets, especially since the onset of the plague. Under this mindset, investors have convinced themselves for years that it makes more sense , Because the yields known as core bonds, on debt issued by countries with stable credit scores, were so low. Tina made me buy growth stocks, Tina made me buy cryptocurrencies and so on.

Well now it turns out there is an alternative after all. For the sake of argument, let’s call it buying ordinary banknotes and bonds – bonds.

The historic blow given to Debt markets So far this year it means that some core bond funds, like the one run by Balls at Pimco, are now offering yields in the 5% range. Sure, it’s below the inflation rate in almost every developed country. But that certainly sounds more appealing than high-tech growth stocks ( Nasdaq shares have fallen by about 26% this year, or crypto (down 55%), or put your cash in the bin and set it on fire, which is about the same thing. Remember to use metal bins, crypto brothers.

“When you have 5% returns on a core bond fund, it starts to look pretty good,” Blass says. By comparison, when prices peaked in the bond market, a debt of about $ 18 billion had negative returns. Investors who bought them were recorded at a loss. So many investors have had to wander into peculiar assets to provide the returns they need.

But now, that lost return has popped up everywhere. US investment-grade debt now yields about 5%. High-yield debt, meanwhile, gives, well, a high-yield, in the region of 9 percent, more than double that level last year. Yields on more risky European corporate debt now stand at the top From 7%, compared to much less than 3% a year ago.

Higher credit costs are definitely a bitter pill for companies to swallow – but for investors happy days. There is no free lunch in the markets. Default companies sometimes, especially in a recession. Spoiled market conditions in times of stress mean that sometimes, even if they want to, fund managers cannot hastily withdraw their money from corporate debt.

But the equation has changed. “You’re paid to be a lender now,” says George Bury, chief investment officer for fixed income at Allspring Global. “The market has changed to the point where you get paid to take a risk.” Just like in the good old days.

This catches the eyes of investors who usually do not look at the so-called dull bond markets.

Alex Verde, chief investment officer for fixed income at Insight Investment, says some of his clients are already sniffing. “We have had a reset in the fixed income environment here. For now, the biggest actions have not yet been taken, but the talks we are having with large institutional investors indicate that you will see big changes in asset allocation over the next 12 months.”

One client, he says, is considering flipping a multi-billion dollar portfolio from growth stocks to debt markets. This is a difficult decision – it means giving up a conviction and consolidating losses on capital holdings. Still, some stock investors and debt investors who have entered more risky territory to try to achieve a decent rate of return are considering going to safer ground with a guaranteed income stream.

“Your home base is to reach 5 to 7 percent with as little risk as possible,” says Verde. “Risk minimization is key to investing. If you can achieve the same return or target with less risk, you need to think about it. Should I invest in, I do not know, Bolivia? Should I be in deep-backed commercial securities?”

maybe not. Maybe a safe and simple corporate debt, with a steady income stream, is your friend after all.

It does not appear that there is still a wholesale shift from stocks to bonds, to say the least. In a recent analysis of mutual fund flows in and out of it, Goldman Sachs noted that bonds have moved on a lower “steep” track, which overshadowed stocks, with just two weeks of Net cash flow so far this year.

But if investors do make the move and gamble on boring old bonds, we will have another addition to the long list of reasons to avoid the risky things that did not make sense in the first place.

katie.martin@ft.com

Bonds regain some sparkle after grim reset Source link Bonds regain some sparkle after grim reset

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