Stellar bond returns … what’s driving them?
2019 has so far been a stellar year for bond returns globally. Even a simple passive exposure to long dated bonds has delivered handsome profits that far exceed the average yield of those bonds.
Insights
Negative interest rates … the abnormal becomes ‘normal’
Hedonic adaptation is a psychology term that describes the human tendency of reverting to a relatively stable or ‘normal’ state following either positive or negative life changes.
Central banks decide to keep the bar tab open
And it’s what’s driving the disconnect between bond and equity performance in 2019.
Record inflows to bonds despite record low yields
Despite bond yields in many markets getting vanishingly low, inflows to bond funds globally have actually accelerated this year.
Yes inflation is low, but that’s already heavily priced in
Recent inflation readings in Australia and the US have reinforced the strong consensus view that inflation will remain very low for a long time.
Strange behaviour in option markets
Finance text books, reams of academic research and practitioner experience all point to the existence of a “volatility risk premium” (VRP), which is a foundational principal of option selling strategies.
The hidden equity beta in many fixed income funds
The managed fund research company Morningstar recently announced they are splitting their ‘intermediate term bond’ category into two new categories – ‘intermediate core bond’ and ‘intermediate core plus’ bond.
Bonds don’t always diversify equity risk
With global bond yields back near the low end of recent ranges, it’s an opportune time to revisit a theme that’s relevant to portfolio construction today – the bond vs. equity correlation.
Low yields increase the equity beta of credit investments
With yield chasing capital flooding back into credit markets and pushing up bond prices, the behaviour of corporate bonds is changing.
Yield curve inversion
Everyone has an opinion but does anyone really know?