Will bond markets collapse?

[fatmango]

With the difficulties Europe is having with recent bond issues, is it possible (likely?) that the bond market collapses? Many investors, including myself, have a large proportion in bonds. Would be interested to hear the views of anyone with a knowledge of the bond markets. Mine is basically basic!

 

[Starcraftmazter]

The EU market has basically collapsed already - hasn't it? If Germany can't sell bonds, I fail to see how anyone else can, let alone at a rate which leaves the country solvent.

Kicking the can down the road no longer works; the speculative part is whether they can do what is necessary to move forward.

If not, then I would be buying the US. But that is speculation. See what Goldman Sachs is advising and do the opposite.

 

[drsmith]

Interesting analysis by the ABC's Alan Kohler,

How on earth did we get to this point, where the bond market vigilantes have gone from demanding monetary discipline to demanding the exact opposite?

The answer is both simple, and frightening. The world's marginal fixed interest investors have gone from being long-term risk managers to short-term yield arbitrage slurplers.

That, if true, can only end like any other bubble.

http://www.abc.net.au/news/2011-12-07/kohler-bond-vigilantes-buy-the-silence-of-our-banks/3716528

 

[JohnDe]

An interesting read -

Who wins from carnage in the credit markets?​

The stakes are rising for bondpickers​

The first rule of investment, according to Warren Buffett, is not to lose money. The second rule is not to forget the first. That is true for no one more than bond-fund managers, whose job is to shelter their clients’ money from volatility while eking out what returns they can. The bloodbath in bond markets so far this year—America’s have had their worst quarter since 2008, and Europe’s their biggest-ever peak-to-trough plunge—ought to be the ultimate nightmare for such timorous investors. Instead many are sighing in relief.

After a brutal but brief crash when the world shut down in March 2020, and until the end of last year, rule number one was pretty easy to follow. Central banks were pumping $11trn of new funds into the markets via quantitative easing and keeping interest rates at rock bottom. Governments offered unprecedented fiscal support for businesses to stop them going bust.

The corollary was that the best thing for bond investors to do was to close their eyes and lend. Quibbling about trivia like the state of the borrower’s balance-sheet or capital discipline seemed like a quaint tradition. In general, high-risk, high-yield debt performed best. Yet the market’s foremost trait was “low dispersion”: a tendency for returns across sectors, issuers and credit-rating bands to be unusually similar.

There is plenty of money to be made in such a market, which a credit strategist at a Wall Street bank describes as “a rising tide lifting all boats”. But it is awkward for active fund managers, whose craft is to use financial nous to select particular bonds hoping they will beat the broader market. Measured by monthly returns between January and October 2021, for instance, around 95% of America’s corporate bonds performed better than Treasuries, with the lion’s share clustered together. That made it hard for prudent bondpickers to stand out.

Yet this state of affairs has started to reverse—and dispersion is back with a vengeance, the strategist says. The successful roll-out of covid-19 vaccinations last year had already “squeezed the excess juice” out of those few sectors, like travel and leisure, whose debt was not already at a high valuation, reducing its potential to appreciate further. Now headwinds, from inflation and snarled-up supply chains to recession risk and the withdrawal of easy money, are blowing against borrowers, clouding the outlook further.

These hindrances are so broad that few companies are able to avoid them. But firms differ widely in their ability to cope. Take inflation. Businesses with rock-solid brands and unassailable market shares, like Coca-Cola or Nestlé, have had little trouble increasing their prices to mitigate rising costs. Other companies—Netflix, for example—have suffered.

Such variation in pricing power spreads well beyond consumer-facing sectors: commodity producers in general are much better positioned to face down ballooning energy and metals prices than commodity purchasers. Those commodity producers that are less exposed to Chinese lockdowns—energy firms as opposed to miners, for instance—are better placed still. At the other end lie industries such as carmaking, vulnerable to both supply-chain snags and recession-induced damage to consumer sentiment.

This adds up to a minefield for investors, whatever their asset class. For bondpickers, divergence will be further fuelled by a withdrawal of liquidity from the market. On June 1st the Federal Reserve will begin winding down its $5.8trn portfolio of Treasuries; by September, it intends to be shrinking it by $60bn a month. That amounts to the disappearance of an annual buyer of 3% of publicly held Treasuries, whose yields are thus likely to rise. As a result corporate borrowers will have to work harder to convince investors to buy their debt rather than seek the safety of government paper. Such a buyers’ market means more scrutiny of debt issuers, and more variance in the yields they have to offer.

Active bond investors—or, at least, those who are any good—will benefit from this renewed emphasis on fundamentals. But they will not be the only ones. Financial markets derive their value to society from their ability to allocate capital to those best placed to make a return on it. A rising tide may lift all boats, but by diluting the incentive to discriminate between borrowers it reduces the efficiency of that allocation. A credit market that makes more of a distinction between winners and losers is one step towards restoring it.

Who wins from carnage in the credit markets?

The stakes are rising for bondpickers

www.economist.com

 

[Dona Ferentes]

Unseen for years, ANZ Banking Group offered investors a 4.053 per cent coupon to buy its new three-year fixed rate bonds on Thursday, as part of a wider $4 billion Aussie bond deal.

 

[divs4ever]

Unseen for years, ANZ Banking Group offered investors a 4.053 per cent coupon to buy its new three-year fixed rate bonds on Thursday, as part of a wider $4 billion Aussie bond deal.

LOL

i would be looking for 10% even if semi-secured but subordinated , 3 years is going to be one hell of a ( bumpy ) road trip

 

[divs4ever]

Interesting analysis by the ABC's Alan Kohler,



That, if true, can only end like any other bubble.

http://www.abc.net.au/news/2011-12-07/kohler-bond-vigilantes-buy-the-silence-of-our-banks/3716528

OR only vulture capitalists will lend out money ( we did have that little Repo problem back in September 2019 )

 

[Dona Ferentes]

Some look at what if, I look at what is .

 

[divs4ever]

question ??
how are these bond-holders getting RICH on a 2% coupon per year on a ( allegedly ) safe investment ( because a stressed government is liable to PRINT it's way out , rather than tighten the budget

that is 2% DESPITE official CPI rates are much higher ( pick a number for the actual inflation )

answer : leverage those bonds 4x or 5x using a derivative cocktail

i am not sure what Alan is sniffing but Hunter Biden will buy some , almost certainly

 

[divs4ever]

Some look at what if, I look at what is .

what if is scary enough thanks , if i looked at what is i would need a second cocktail of medications to cope

 

[divs4ever]

BTW last i read super funds needed to generate 8% a return per year to grow the nest egg to give it some chance of being a sustainable income ( for the future retiree )

so some pension funds must be a total train-wreck , or taking on crazy-brave risk profiles

and surely Alan Kohler would remember that

i saw what was happening to my super between 1995 and 2005 so in 2010 i took the opportunity to liquidate it ( it did a lot better as AMP shares between 2011 to 2018 , than it did in the super fund ( run by experts )

 

[Dona Ferentes]

what if is scary enough thanks , if i looked at what is i would need a second cocktail of medications to cope

- Better if you get the first cocktail settings right, pal.

Asset markets are emerging from a decade of rampant bond yield manipulation undertaken by the world’s largest central banks. Quantitative easing (QE) was the tool utilized by central banks.

In the main, central banks effectively printed money, targeted a particular bond yield/s in markets and then intervened by secondary market purchases to attain that yield. Over time, central banks became the largest owners of their government bonds. For instance, in the US, the Federal Reserve owns about US$7 trillion of bonds out of the approximate $30 trillion on issue. In Japan, the BoJ owns around 50% of all Japanese government bonds...


.
...after QE, the tightening (QT) will add to the supply of bond issuance by governments and more so if governments do not concurrently bring their fiscal deficits back into order. The effect of a seemingly endless supply of bonds means that bond prices will be under pressure and yields will likely rise. This explains why US 10-year bond yields are beginning to rise even whilst measures of US inflation decline. Expect a similar scenario to play out across European and Australian bond markets.

How higher yields may affect asset allocation​

Rising bond yields mean that the ‘risk free rate of return’ or the ‘risk free investment hurdle’ will lift and be a headwind for the pricing of all assets in the coming few years. This leads to the following conclusions for both Asset Allocation and assets prices over the next year:

1. Long dated bond yields (past five years) will continue to rise leading to capital losses that offset higher yields.

2. Shorter dated bonds (maturity of less than two years) are preferred as they currently match or exceed expected inflation and the risk of capital loss (via market prices) is not high.

3. Rated corporate debt is preferred to bonds as the repricing of long-dated bonds flows through. Staying short in maturity is desirable (up to three years). Mortgage-backed securities and hybrids are already seeing higher running yields and will be weighted into diversified portfolios as a core income generator.

4. Cash rate settings will remain elevated for longer than generally expected. Whilst cash rates in the US will likely fall during 2024, the same cannot be expected for Europe or Australia.

5. Equity P/E ratios will moderately decline with bond prices, so investors need to focus on companies that will grow earnings greater than and offset P/E compression. This will be difficult (short term) as economies slow with tight credit conditions being maintained over the next year.

6. Importantly, the longer-term growth outlook for Australia remains positive and far superior to Europe. The current weak AUD reflects negative “real” cash rates that won’t reverse until mid-2024. This suggests that a re-weighting to Australian equities from international equities or a currency hedge should be considered at some point early in 2024.

7. Rising bond yields will lead to a lift in capitalization rates for property with the commercial sector remaining under pressure. Non-discretionary retail (suburban shopping centres), industrial and agriculture will also experience cap-rate compression but offer better growth to offset this and particularly taking a five-year view.

- John Abernathy (Clime)

Clime time: Asset allocation decisions for SMSFs

Asset allocation explains up 70% of total investment returns, making it of critical importance to SMSFs. Here are some guidelines for how they should go about it and the macroeconomic events that could influence allocations.

www.firstlinks.com.au