The bond market is no place for young men, according to Tom Moore, bond fund manager at Invesco.
He says: “My boss has a chart that shows the direction of long-term interest rates and says he wouldn’t want to be a young guy starting out in the market now. As a bond investor it pains me to say this, but equities look more attractive right now.”
After 40 years of no real inflation, it looks like rising prices might be creeping back into our economy, and the 40 good years for bonds could be coming to an end.
The long-term direction of bond markets was set around 1980, when Paul Volcker became chairman of the US Federal Reserve.
Volcker took the view that the priority was to reduce inflation, which in 1980 was more than 12 per cent; by 1983 it had fallen to below 3 per cent, and would never again hit double digits.
Low inflation is extremely positive for bonds, as it makes the fixed income they pay worth more.
By demonstrating at the start of the 1980s that they could control inflation using monetary policy and had a desire to do this, central bankers created a bull market in bonds that lasted for the subsequent four decades, making it an extremely good time to be active in that market.
The effect of the central bankers' actions was to make bonds more attractive, causing prices to rise, and creating a long-term bull market.
Those policy makers responded to the global financial crisis of 2008 by cutting rates further, and instigating a programme of bond buying, which further increased the attractiveness of bonds.
The subsequent economic recovery from the financial crisis was mediocre in nature, and prevented inflation from rising sharply, something which also helped bond valuations.
At the first hint of inflationary pressure, in 2013, the Fed announced its intention to “gradually” withdraw the bond buying programme as a way of reducing the amount of cash in the system, and thus reduce any inflationary pressure.
The outcome was a sharp sell-off in bonds, an episode known as the 'taper tantrum'.
The Fed subsequently moderated its language, and bond prices returned to normality, before the advent of the pandemic sent prices soaring and yields falling, as investors embraced bonds' traditional role as a 'safe haven' asset.
Prices have drifted back downwards since economies began to unlock, but are actually just about back to the levels they were at pre-pandemic, according to Phil Milburn, fixed income fund manager at Liontrust.
That presents bond fund managers, and asset allocators, with a dilemma, as bonds were considered expensive pre-pandemic, and now have reverted to that level despite the radical uncertainty of the world around us.
If the actions of Volcker started the bond bull market in the early 1980s, it was the words of Lawrence Summers, a former chief economist at the World Bank, who described the conditions prevalent in the global economy after the financial crisis as being “secular stagnation”, which guided many investors thoughts since then.