Bonds, particularly government-issued bonds, have enjoyed a nearly four-decade long bull market. Since the high inflation of the mid-seventies, yields have been in a steady, and fairly steep, decline.
In 1974, as McDonalds was opening its first UK restaurant and inflation hit 17.2 per cent, UK 10-year government bonds also peaked, with a yield above 17 per cent. Six years later, the yield had fallen to 12 per cent and the world lost its first Beatle, John Lennon.
By the time the pound coin was introduced in 1983, the 10-year paid just under 10 per cent, where it lingered for a whole decade before resuming its decline. Between 1993 and 2003 the yield halved to 5 per cent, and remained steady until the global financial crisis prompted central bank intervention on an unprecedented scale. Investing at almost any point in that 35-odd years would have generated a positive return today.
So (as the chart demonstrates) with yields currently around 1.75 per cent, well below their historical average of 4.8 per cent, and commentators announcing that the age of bonds is over, should a logical investor be selling bonds as fast as possible? Not necessarily.
First of all, selling all bond holdings on the advice of others would be extremely rash - now is not the first time that a turning point in the fixed income market has been called by various investors and analysts. Bill Gross, the manager of one of the world’s largest bond funds, sold all of his US government bond holdings at the beginning of 2011 stating that there was very little return left to go for. 10 year US Treasuries returned 16 per cent that year. Acting on the advice of so-called “experts”, and even real, proven experts such as Mr Gross, is not a sensible investment process.
Secondly, looking at the fundamentals underlying current historic lows in bond yields, there seems to be no immediate likelihood of a dramatic spike upwards. The central banks of the US, the UK and Japan are printing money on a huge scale, and the bulk of it is being spent on their own nation’s government bonds. As long as it continues, this buying pressure will keep the price of quality government debt high, and yields correspondingly low.
Lastly, bonds should not be considered in isolation. A well constructed long-term investment portfolio should include a variety of asset classes, of which fixed income will form a greater or lesser part depending on the goals and situation of the individual. Many investors are looking to try to match long term liabilities in a predictable manner, and it is here that bond allocations are still very important. Once a bond is purchased, if it is held to maturity, the future income is both fixed and predictable.
There is no objectively correct time to sell bonds – for one investor, the time may be now, for another it may never come. In general, fixed income assets will always have a role to play as part of a diversified portfolio, and that is unlikely to change.
Justin Urquhart Stewart
