The global bond market is feeling negative.
Truly negative. Like “pay the issuer to take your money for years” negative. Governments such as Germany, Japan, and Switzerland all have 10-year bond yields that are below zero without even having to adjust for inflation. In fact, if you add up all the negative yielding debt globally we are back to 2016 levels at $11.7 TRILLION! That is a lot of capital looking to pay for the privilege of parking cash in a perceived “safe” place. It is no wonder that gold prices have been on the upswing. Aside from the Armageddon-type fears that attend increased US/Iran tension, if negative yields deepen further then gold may actually start to compete for the lowest negative cost to carry (from storage, insurance, and foregone interest earned)!
This is not just a phenomenon outside the US. While US yields did not go negative, the short maturities certainly rested comfortably on/near zero. What happened once may still happen again. Last week at a US Federal Reserve conference in Chicago discussing many topics including communication strategy, Chairman Jay Powell made a remark which when paraphrased said that “the next time the Federal Funds rate falls to zero – and there will be a next time – it will not be a surprise.”
All of this again makes an investor consider risk. It is an important issue that we think about continuously in our daily work to construct investment portfolios to meet objectives. As we have said many times, risk can be described in many ways but the key risk is that an investor does not meet their objective. Our clients have goals – a charitable mission, personal lifestyle, or generational stewardship. Financial returns fund those goals often over long time horizons. Time horizon is critical in assessing what is deemed higher or lower risk.
But again what risk? Fixed income with anemic yields provide capital stability in the short-term and thus could be considered less risky for short periods of time. Over longer periods, it could be considered more risky as returns fail to keep pace with inflation even on a pre-tax basis.
Amazingly, capital continues to flow more and more into bonds. Perhaps there is some element of performance chasing as bond funds with interest rate sensitivity boast capital gains as yields have retreated towards lows (bond yields down, prices up). Not that any investor is likely to admit that as a reason.
On the other hand, there are equities which have a long history of wide price swings through time. Equity market valuations in the US are full with sentiment overly optimistic on the Fed’s ability to maintain reflation causing many to fear the next downswing. But looking over a longer period, we believe valuations remain fair to suggest reasonable returns above inflation to support philanthropic, personal, and generational goals.
At any point in the cycle, a thoughtful balance of the short-term (bonds) and long-term (equities) based on individual circumstances is key. Of that we remain positive.
Will Skeean, CFA
Partner – Investment Management Team Chair