Page 41 - DIY Magazine March 2018

IS THE BOND BULL MARKET REALLY OVER?
a) Given that ORB listed linkers are trading at very high premiums this isn’t a viable alternative
b) Short-dated issues, perhaps those maturing within 5-yrs (2023) are an option. Looking at ORB there are several trading close to 3%, this excludes the ‘fallen angels’; please refer to point 1, this is still a spread over Gilts
3. Think in terms of ‘real returns’ not absolute returns; by real returns for income seeking investors, we refer to the yield less the rate of inflation.
a) The Consumer Prices Index (CPI) 12-month rate was 3.0% in January 2018, unchanged from December 2017.
b) Any bond yielding 3%, or more, will buy you more goods and service than it did a year ago
Now, in summary all of this may sound rather hopeless; no new issues to satisfy your need for yield; mixed messages from the markets. However, we are where we are, rates are low and will continue to be even when they ‘normalise’, get used to it - maybe 4% is the new 10%. As an example, I was reminded of the 1983 film, Trading Places, included in the cast was an entrepreneurial prostitute played by Jamie Lee Curtis who had saved up $42,000 in US Treasury bills. She calculated that with the accruing interest from the bonds she could retire after a few more years on the job.
Given today’s low rates readers might be surprised that a modest portfolio of short term, ultra-safe loans to the US government could ever yield a big enough bonanza to retire on. However, at that time the three-month T-bill yield averaged nearly 9%, compared to 0.7% average of the past decade.
To put this in context, Trading Places-era bills would double your money in less than nine years. At today’s yield it would take more than half a century.
Oh, and one last thing, a wise man (Mark Twain) once said, ‘I am more interested in the return of my money than the return on my money’.
Last year, many analysts predicted doom and gloom, instead, global fixed income enjoyed its best year in a decade, returning 7.4% to investors in the Bloomberg Barclays Global Aggregate bond index
But then we have rising Inflation. Typically, inflation is the enemy of bond investors as, if market participants believe that there is higher inflation on the horizon, interest rates and bond yields will rise as the prices of their bond holdings decrease.
Some commentators are saying sell bonds and buy risk assets (equities to you and me), but then, confusingly, others are saying that stock markets are overvalued, and the bull market is overdue a ‘correction’ (code, for
it going down).In short, everyone has an opinion, the problem is that most are contradictory. Where would Mr Bond turn for income? ORB still offers the best access for investors seeking yield, yes, they are low but then so are benchmark rates, in the UK
• 2-yr Gilts yield circa 0.86%, and • circa 1.55% over 10-yr.
Investors should, perhaps consider the following:
1. The spread they are earning over the benchmark, e.g. an ORB listed bond issued by BT which matures in March 2020 yields circa 1.4%. That equals an extra 0.60% for holding BT bonds
2. Interest rates are expected to rise, in which case traditionally people either buy inflation-linked bonds (‘linkers’), or shorter duration bonds.
41 DIY Investor Magazine | Mar 2018