(News Bulletin 247) – With the rise in interest rates, yields on different types of bonds are returning to high levels, often exceeding 4%. This nurtures their appeal and consecrates them as attractive alternatives to equities.
The acronym “Tina” may only bring to mind the first name of one of the greatest American artists of all time, namely singer Tina Turner. But on the markets this word refers to a “mantra” which for years has dominated the minds of investors, namely “there is no alternative” (“Tina”, therefore), for “there is no alternative” .
This short and pithy phrase initially gained popularity with British Prime Minister Margaret Thatcher, “there is no alternative” being one of her shocking political slogans. On the financial markets, this term “Tina” is linked to the rise of the equity market in a universe of low interest rates. Because in the expression “there is no alternative”, it is indeed to actions that the lack of alternative refers.
>> Access our exclusive graphic analyses, and enter into the confidence of the Trading Portfolio
“After years of loose monetary and fiscal policies, in which volatility and risk were gradually removed, bond yields fell to near 0% or even below zero. Investors had no other choice than to invest in equities to obtain reasonable returns.It was the era of “Tina”, explains BNP Paribas Wealth Management.
This era is now over. And a plethora of other acronyms have emerged in recent months, such as “Tara” for “there are reasonable alternatives” (“there are reasonable alternatives”), “Tiara” for “there is a realistic alternative (“there is a realistic alternative “) or even, less elegant, “Tapas” for “there are plenty of alternatives”.
All these terms appear for a good and simple reason: the end of free money and the rise in key rates have resulted in an improvement in the yields offered by bond securities, and not only on sovereign debt.
“When rates rise, bond prices fall, which can cause fixed income investors immediate pain. [les produits à taux fixes comme les obligations ou les devises, NDLR]. However, rising rates are beneficial for bond ‘income’, i.e. coupon yields”, natixis.com/us/portfolio-construction/bond-basics-interest-rates-and-yields”>points out Natixis Investment Managers. The rise in rates therefore results “in an increase in income, which accumulates over time, allowing bondholders to reinvest coupons at higher rates”, continues the financial intermediary. “Overall, higher rates provide the opportunity to increase income and total return in the future,” concludes Natixis Investment Managers.
This improvement in yields supports the attractiveness of bonds, which thus become the “alternative” in question to equities. Especially since these last titles seem to be starting to run out of fuel.
“We believe that the overall resilience of equity markets seen in 2023 would diminish in the event of a downturn. [économique, NDLR]. Earnings expectations seem too high and valuations too high. We are underweight equities in multi-asset portfolios,” Pimco managers noted in their May allocation outlook.
And, according to the latest monthly survey conducted by Bank of America, managers have never been so overweight bonds relative to equities since March 2009.
“The appetite of investors is present because there is yield, finally, on the bond market”, underlined at the end of March on News Bulletin 247, Sébastien Barthélémi, head of credit research at Kepler Cheuvreux. The expert explained in particular that the bonds of companies in the investment category (“investment grade”, i.e. the best rated companies) displayed levels of returns unprecedented since the financial crisis which had spread from 2008 to 2012.
A recent research note from asset manager BlackRock illustrates, more broadly, the resurgence in the attractiveness of bonds. On a panel of bond indices of all kinds (sovereign, American municipalities, companies, etc.), with average maturities varying between 4 and 13 years, and representing 70% of the Bloomberg Multiverse Bond Index, the company observes that more than half of these bond indexes in April offered a yield of more than 4%.
This is the highest proportion observed since 2008, the year of the great financial crisis which was followed by long years of low or even negative rates from central banks. For years, the proportion of these indices with a return of more than 4% was less than 25%.
“Global investment grade (IG) bonds have come back strong after a long purgatory. This is why we show a preference for the income offered by bonds”, underlines BlackRock.
For Pimco, the different market scenarios and underlying macroeconomic conditions point to a common conclusion when it comes to investment themes: “bonds are back”. Thus Pimco, which – important clarification – is a large bond manager, believes that bonds should “significantly” outperform equities during the “cyclical horizon”.
BlackRock for its part makes recommendations. The asset manager is overweight very short-term, high-quality government bonds. “Indeed, the income offered is attractive, and the credit and duration risk – the sensitivity to interest rate fluctuations – is limited”, explains the asset manager. If it considers that risks exist in relation to the uncertainty surrounding the raising of the American debt ceiling, the group believes that a solution should be found.
On corporates and investment grade issuers, BlackRock is “tactically overweight IG-grade European bonds, which we favor over US bonds due to more attractive valuations and shorter duration.”
The asset manager warns, however, that while good quality bonds provide attractive income, their ability to cushion portfolios from falls in risky assets is now less than in the past.
I have over 8 years of experience working in the news industry. I have worked as a reporter, editor, and now managing editor at 247 News Agency. I am responsible for the day-to-day operations of the news website and overseeing all of the content that is published. I also write a column for the website, covering mostly market news.