Hello everyone and welcome to another week. I hope, like me, you are full of vigour and enthusiasm for the challenges ahead; if not, no worries. Sit back and relax while reading this week’s News, Views and Truths.
Equities continue to plough on forward, generating significant outperformance for this asset class as the world anticipates a reopening of society and business. But, like everything in life, this is not the full story.
There could be something rotten in your investment portfolios.
As we have discussed, both on these pages and during our numerous webinars over the past 6 months, our fear has been that the 30-year bull market for the low-risk, Fixed-Income asset class could come grinding to a halt. Well, ladies and gentlemen, it’s pretty safe to say that this situation has arrived.
Last week, US Treasury yields surged as investors dropped longer-dated government bonds on the expectations of economic recovery. This created a huge jump, resulting in a one-year high yield in 10-year Treasuries, of 1.298%. It did not stop there and ended last week at 1.372%.
And it’s not exclusive to the US. UK 10-year Gilt yields have jumped to 0.69% on the back of recent Sterling strength and rising inflation expectations. Germany’s benchmark 10-year bond yield rose to a fresh eight-month high this morning on similar market considerations, the 10-year Bund rising to -0.28%, a fresh eight-month high. This followed last week’s 12 basis points rise, the biggest weekly jump since June last year.
I expect you all to be sitting there saying, “and?” Let me show you a year-to-date chart.
When yields go up, prices go down. When yields go up, fixed income investors lose money.
Year to date, fixed income is losing money. A lot of money.
And this could just be the beginning. If the steepening of yields and subsequent price drops are an indication of the future direction of travel, lower-risk-tolerance investors could give up all of their equity gains through fixed income losses. From the very portion of their investments that are deemed “low risk”.
For those Three Counties clients who are reading this, we have had positions in play since the Summer to counter this scenario. The chart below shows the falling fixed income indices used in the previous chart, along with the fixed-income funds which were recently introduced to the portfolios, to protect our lower-risk portfolios’ values if yields moved higher. And as they have moved higher, our fund selection has protected.
To those reading who are not clients of Three Counties, please do not hesitate to get in touch if you have concerns. The sooner you do, the quicker you can have peace of mind.