Can an investor make money in the current bond market? Yes, but don't expect continuation of the "Golden Age" of bond investing of buying long duration versus short-duration bonds and holding as a long-term trade.
This does not mean that returns cannot be made in the short-run or that bonds are not a good diversifier with respect to equities. It does mean that the past strong performance is unlikely to continue. A normal world shows less maturity premium. A look at the priors before making a judgement says that investors should show care with holding bonds. The storing for increasing bond exposures should be weighed carefully against base conditions.
- Inflation is lower with lower expectations.
- Credit risk even for sovereign bonds has declined and is perhaps underpriced.
- The curve albeit upward sloping again is still relatively flat.
- Term premia are close to zero.
- Perhaps most importantly, history is not on the side of bond investors.
This does not mean that returns cannot be made in the short-run or that bonds are not a good diversifier with respect to equities. It does mean that the past strong performance is unlikely to continue. A normal world shows less maturity premium. A look at the priors before making a judgement says that investors should show care with holding bonds. The storing for increasing bond exposures should be weighed carefully against base conditions.
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