Every morning I get an email from Katie Martin.
She is consistent in pointing out that markets move against those who hold bonds for growth when the world is feeling nervous
Katie finishes as this blog starts. This is not about Keir Starmer. Bonds are in a freakout everywhere on the globe there is a bond market!
the personality politics really don’t matter that much. A bit, absolutely, but not lots.
I know I’m a broken record on this, but everyone calm down.
UK disaster tourists, tell me I’m wrong.
This bond issue is important. I’m telling myself “calm down“when I stare at the carnage of lifestyled DC plans that are buying them and selling equities.
I’m in one and I hate it – hate being told that I’m defensively invested when my retirement is disappearing in front of my eyes. I’ve been talking with Patrick Tooher of the Mail about this most of this week.
I’m tempted to blame Keir Starmer for wrecking my plans but I know it’s not. I’ve been told this by Patrick Tooher and Kate Martin! Edi Truell posted as much and is as consistent in pointing out that while bonds are paying great yields they are rubbish to hold for capital returns. This is the message I tell myself – and yet like most people of my age I’m investing for the next 30 years in bonds! I have it written on my heart!
“It’s nothing to panic about , just don’t let yourself be put into lifestyling bond funds!”
Yet I do! Why do I fall for the “bonds are defensive” when I know everyone I respect is right in staying invested in real assets!
It’s good to remind myself of sanity from Katie!
Join me on a magical mystery tour of headlines and factoids about weakness in the global government bond markets this week:
- “The US government has sold 30-year debt at a 5 per cent yield for the first time since 2007 amid mounting signs that Donald Trump’s war in Iran has unleashed a new surge in inflation.” Oof!
- Japan’s 10-year yield is now above 2.6 per cent. That’s comfortably the highest I can ever see it on my screen, ever. Its 30-year yield is getting close to 4 per cent. You read that right. The country that kept bonds in the deep freeze for decades is finally seeing some movement, and it’s up (for yields).
- German Bunds are yielding 3.6 per cent for the 30-years, the highest since 2011. The 10-years are also over 3 per cent.
I think you get the idea here. Bonds are being put through the mincing machine globally at the moment, primarily due to signs that energy-led inflation is taking hold. Central banks may have to start cranking up rates to deal with this, and that pushes up borrowing costs everywhere. This brings me to:
- Gilts are not happy. Ten-year yields are over 5 per cent, the highest since 2008. Thirty-year yields are also at 5.7 per cent — ouch!
Putting that point last demonstrates the UK is not such an outlier. Yes, the UK is experiencing one of its periodic political dramas. And yes, gilts have weakened substantially. Yes, this is bad. But is it all the fault of the politics? Far be it for me to play down the powers devolved to Andy Burnham, mayor of Greater Manchester and pretender to the top job in Downing Street, but as far as I’m aware, he has nothing to do with the Japanese government bond curve.
Clearly, some of the stress about gilts is overdone. That’s not to say they are not vulnerable. They lack the protections that some other major bond markets enjoy — the alphabet soup of European Central Bank protection measures in the Eurozone, the luxury of being the world’s dominant reserve assets in the case of US Treasuries, and so on. The UK economy has niggling inflation problems, which bond investors don’t like. And there was that whole Liz Truss thing.
Higher borrowing costs are indisputably unhelpful for the UK. But sterling is steady (around $1.35 or €1.15). You can put your tin hats away.
Politics are making a bad matter marginally worse, for sure. Politicians themselves could make it all much, much worse still. (If you are one, please read this.) Specifically, things that would make it worse would include a run-up (real or potential) in inflation, fiscal incontinence or loads of new borrowing. Other than that, the personality politics really don’t matter that much. A bit, absolutely, but not lots.
We’ve been here before!
For decades prior to 1997 and when corporate DB pension schemes and annuity purchases were the norm, bond and gilt yields were significantly above current levels. Yields were typically over 8% with future inflation then forecasted at 4 to 4.5%. the last 30 years may be the anomaly!
Gilts and bonds are now better than they were for income, but why do asset managers not routinely offer them as distribution units? The goal of maximising value of assets under management seems to dominate.
While annuities now offer better value than in the decades when they not unreasonably fell out of favour, they might well offer even better value in future, Like any other investment you should always aim to buy low. This just shows the folly of pension schemes following an LDI approach – why fix the price at today’s values? Whatever happens in the future, you are always likely be better by seeking to maximising the value of your assets. Pension schemes have the freedom to time their purchases of (bulk purchase) annuities, possibly unlike individuals relying on their pensions. the folly of LDI has cost the UK Economy dear and limited the pension prospects of millions!
Yes indeed Oldie
“Specifically, things that would make it worse would include a run-up (real or potential) in inflation, fiscal incontinence or loads of new borrowing.”
Uh oh.
>>> I’m telling myself “calm down“when I stare at the carnage of lifestyled DC plans that are buying them and selling equities.
I’m in one and I hate it – hate being told that I’m defensively invested when my retirement is disappearing in front of my eyes.
…
Why do I fall for the “bonds are defensive” when I know everyone I respect is right in staying invested in real assets! <<<
Sorry to read the above.
Lifestyling is intended for pre-retirees planning to purchase an annuity at retirement. Is that you? If so, the duration impact on the current portfolio is mirrored by the annuity that will be later purchased.
Otherwise, if the intention is to draw down the portfolio, then with a probable investment horizon of 15-30 years or longer, you should remain invested in a portfolio that reflects your risk and volatility tolerance, akin to the portfolio used in the latter 5-10 years of the accumulation phase but perhaps with a tilt to more income-generating assets if that suits your investment personality.
This means still holding a substantial — or very substantial for those with high risk/volatility tolerances — proportion of equities, to deliver the longer-term inflation protection and growth required for such a length remaining investment horizon.
Platforms still lifestyling people, when fewer intend to actually purchase annuities, or at least not with their whole pot, is a real problem. Well intentioned but unfortunate.
You will not have to buy an annuity from your DC scheme when CDC become generally available. So long as your employer participates in CDC as a workplace pension or you are in a DC plan that offers CDC at retirement , you will have a default pension that doesn’t involve buying an annuity or de-risking. The only reason that a CDC scheme might buy bonds is as an insurance against it getting mature by not attracting new younger members. This is known as the continuation option. It shouldn’t mean CDC is involved heavily in defensive strategies.