The sell-off we’ve experienced within the Bond market over the past few days has been extreme in both speed and magnitude. And whilst it’s not completely out of keeping with the year so far, this additional drop in returns following the new government’s recent “mini-budget” is undoubtedly concerning. Particularly when you look at the positive historical returns we’ve seen in this space through the Quantitative Easing years since 2008/9.
Coupled with falling equity markets, investing through 2022 has been a difficult experience. Yes, the losses from Bonds have unquestionably been greater than expected. But at the same time we knew yields had to eventually rise. Similar to the way many “stay at home” tech stocks made years’ worth of returns through lockdown, Bond holders have had future losses brought forward.
Is there an upside?
The positive – and perhaps contrarian - angle now is that Bonds haven’t looked this attractive for a long time. That might feel like a difficult view to take given everything that’s going on, but the levels of yield available right now are comfortably higher than we’ve been able to access for a number of years.
Priced in
It’s important to remember that a lot of the negativity in the news is already priced in. The losses aren’t based on what’s happening right now, but on what we think will happen over the next few years. Of course, the idea that interest rates might reach 5 or 6% over the coming months or year is worrying, but the market has already reacted to that. Future gains or losses will be predicated on whether or not expectations are realised.
"Time in the market", not "timing the market"
So, whilst negative returns within portfolios don’t feel great, crystalising them has the potential to be worse. Even with higher interest rates, there's currently little chance of beating inflation in cash, or accurately timing the re-entry point.
“Buy and hold” and focusing on “time in the market” are regularly quoted adages, but it’s because they continue to be true.
Uncertainty is inherent in investing. You need it to drive long term returns. And if you look back, points of pain or stress in the market can often be the times of long term opportunity.
Listen to Jasper's views on FT's Asset Allocator Podcast
This week Jasper joined FT's Asset Allocator Podcast to chat about our use of Bonds amid the market turmoil, as well as our historic preference for direct property over infrastructure and why that's changing. He also explains our approach to equity income and why Parmenion is the only DFM in the Asset Allocator database to use passive funds for UK equity income.
Please note: This podcast was recorded before the Bank of England launched its £65bn bond-buying programme which caused gilt markets to recover sharply.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.