Tag Archives: Bonds

Yields Are Rising

Yields on US 10 year Treasury notes are pushing upwards once again:

This is a good thing. Why? Because they are rising in response to better growth metrics in the US economy. But aren’t higher rates prohibitive to growth and investment? A some point yes. We are a long way away from that point – wherever it may be…

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How Major Asset Classes Performed In January

In a world inundated with terms like ‘alternate facts’ and ‘post truth’ we take comfort in numbers.

Our business is simple, you make money for your clients or you don’t. No amount of academic accreditations, algorithms or excuses can compensate for not making successful investment decisions (see ‘Long Term Capital Management’…).

Here is how major asset classes performed in January:

gmi.01feb2017
LINK: Major Asset Class Performance January 2017

And here is the performance of our top equity holdings:
top 10

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Emerging Market Bonds – Still an Attractive Asset Class

em bonds

The majority of our fixed income returns over the past number of years have come from Emerging Market bonds.

In the wake of Trump’s election victory, rising rate assumptions, a higher US dollar and a higher anticipated degree of trade protectionism led to a strong sell off in Emerging Market bonds. We took this sell-off as a buying opportunity.

The following link sums up our investment rationale quite well:

LINK: Fear Not Emerging Market Bonds

Although mark to market pricing and wider bid-ask spreads can lead to higher volatility in Emerging Market bonds, we have found that choosing healthy companies in the right sectors can generate outstanding risk adjusted returns for long term investors.

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Our November Results – The Game Has Changed

nov-2016

Last month was a very eventful month that saw drastic moves in all major asset classes.

Following Donald Trump’s victory in the US presidential elections, market sentiment changed not over weeks or months, but over hours and days. The vast majority of mainstream media and sell side analysts were dead wrong in their predictions – both in predicting who would win and in how financial markets would react if Trump won.

In the days that followed Trump’s victory, markets showed that investors are expecting heavy spending on infrastructure, tax cuts for both companies and individuals, and less onerous government regulations. As such, many sectors rallied strongly for several days, and all major US stock market indices reached new highs. It remains to be seen which of these policies are actually implemented and to what degree, but in the meantime it would be foolish to fight the tape.

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Global Bond Funds Suffer Worst Ever Meltdown – But We Feel Fine

Just over a month ago, we pointed out that the tide was turning on negative yields:

LINK: What Happened to Negative Yields?

The turning tide has become a tidal wave:

LINK: Bonds Suffer Worst Ever Meltdown

Here are the two month returns for the Vanguard Total Bond Market ETF (the most popular bond ETF: BND US), the US 10 year note, and the German 10 year bund:

bond-comp-nov2016

Now, these are not cataclysmic draw downs, but the effect on investor psychology can not be discounted. Bonds have had a wonderful 30 year run, and bond funds have seen massive inflows. But nothing lasts forever, and market movements can become self fulfilling prophecies, especially when it comes to crowded trades. Losing money on bonds is not something that this generation of investors are used to, and outflows from bond funds will lead to forced selling, which will lead to further pressure on bond prices, which will lead to further bond fund redemptions, which will lead to… I think you get the point.

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Get Ready To Start Buying Emerging Market Stocks

mxef

Emerging market currencies, bonds, and stocks have sold off since the US elections as protectionist banter and hyperbole involving the implementation of trade tariffs has seen money flock to US assets and strengthened the US dollar. However, when the dollar is strong, foreign assets become cheaper, and shrewd investors will be wise to look at oversold EM assets in the next couple of months.

Here is a five year comparison of the S&P 500 Index -vs- the MSCI Emerging Market Index:

sp-v-em

As you can see, Emerging Market stocks have massively under performed the S&P 500 Index and have actually lost money for investors whereas the S&P 500 has almost doubled over the same period of time.

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Investors Are Bailing Out of Bond Funds

flows

Yields are rising in the US in anticipation of higher rates and increased government spending on infrastructure. This means that bond prices are falling and will most likely continue to fall. Given the amount of money that has flowed into bond funds, a systematic reversal of this trend could be brutal for those holding longer bonds. ‘Everyone’ knew that rates were too low, but money kept on flowing into bond funds. Bonds even started being issued at negative yields. This was crazy, but it soon seemed completely normal because everyone was doing it. Institutional investors ‘had no choice’. Wrong. You always have a choice. I still can’t believe that there investors that bought 5 year German Bunds with a zero coupon above par…

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