Why everyone else can panic about rising bond yields

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Thirty years ago when I started on the grad programme at Morgan Grenfell Asset Management, we equity kids looked down on the losers in fixed income. Bonds were dull and no one was particularly hot.

At trading them, I mean. Shame on you! But little did we all know that fixed income — from government securities to corporate bonds — was about to embark on the mother of all multi-decade runs.

Sure, equities have done brilliantly over the period too. The MSCI World index is up six-fold since I purchased my first share in 1995 by filling in a ticket. In pen. Buy 10,000 Sony at the open, please.

But compare a long run chart of 10-year Treasury yields, say, with the S&P 500, or any other bond and equity bourse. While stocks have whipsawed their way to glory, bonds have gained in a relentless march (as yields fell).

This has always made me ponder. Have rising equities or bonds produced more millionaires? Shares have superior risk-adjusted returns. But fixed income markets employ more people and the asset class is $30tn bigger.

In the latter you have the mega-money managers, such as BlackRock or Pimco, that owe their riches to ever-falling bond yields. Or those football pitch-sized fixed income trading rooms at investment banks — printing presses as prices rose.

And all the high-yield credit funds rammed with dodgy corporate bonds that would have defaulted had it not been for borrowing costs falling year after year? I have friends in that game with villas in Mallorca bigger than Versailles.

Of course the long decline in bond yields did more than lift prices of fixed-income assets. It also turbocharged anything reliant on gearing as debt cheapened. Hello the fortunes made in private equity, venture capital and real estate.

I mention all of this to explain why the

Is the UK in this camp? Many believe so. I don’t care either way, frankly. If Britain is fine, so is my FTSE fund. If not, and the pound cracks, a huge exposure to overseas sales insulates large British companies somewhat. And they’re still cheap.

Indeed, the storming greenback of late has helped all my funds that are priced in dollars and translated into sterling. Hence the solid performance of my portfolio this week. (I’ll double my money by Christmas if this keeps up!)

A lower pound has even helped my Treasury fund gain a couple of per cent when this environment should be hurting. Thank goodness too that I’m deliberately invested in shorter-dated securities, whereas it’s US long-term yields everyone is fretting about.

I have always thought the so-called long end of the curve was too low given the dynamism of the US economy. Meanwhile, I’m also confident, based on history, that if markets totally freak out, the Fed will rush to my aid by cutting policy rates.

This disproportionally helps the short end — where bond prices would rise. I am also comforted by the fact that central banks have what is known as an “asymmetric reaction function” when it comes to equities.

When stock markets jump 20 per cent, policymakers twiddle their pencils. Should they fall by a fifth, however, everyone starts screaming (especially the rich) and central banks cut rates real quick.

So in all I am happy with my portfolio irrespective of where this bond market wobble ends up. The biggest risk is the UK. But even here I win if sterling takes a bath. Such is the negativity, though, maybe a contrarian bet is worth a column next week?