You know the feeling when you find yourself in a completely unexpected, how-did-I-get-here situation? Born in Manhattan, raised in Chicago by parents from South India, with no familial connections to the UK, I would never have thought I would be in Barnsley, South Yorkshire the day a real-estate mogul/ TV personality was elected president of the United States of America.
But there I was, speaking to financial advisers and wealth managers in a lovely manor house-turned-hotel, discussing fixed income interest rate risk with one of my favourite charts.
It is an illustration of the total return losses that would be caused by a 1 per cent rise in gilt interest rates, and we typically use it to show duration risk, or the sensitivity of a bond's price to hypothetical change in yields.
While my Barnsley/Trump scenario would have been almost inconceivable to my three-years-ago self, the premise of the duration risk chart almost came true soon after my day up north ended: gilt yields have risen dramatically over the past few days and the 10-year specifically has jumped 0.84 per cent since its low point in August.
Gilts, Treasuries, and the government bonds of any developed economy for that matter, are supposed to be the stable, safe, go-to asset for multi-asset investors. They are meant to be the trustworthy aunt who comes around every Thanksgiving with a solid pumpkin pie - not much pizzazz but much appreciated reliability when the 13-year-old twin cousins think they are on the final round of Bake-Off and end up serving an inedible mess of food colouring and soggy sponge.
In recent days, they have behaved somewhat differently.
Given the upswing in gilt yields, how do returns now look? Pretty soggy, unfortunately. Investors who bought at the height of the gilt rally, in August this year, are now sitting on a 16 per cent loss on the 30-year. Even those who got in just two weeks ago, on 4 November, are now down 5 per cent.
But very few of us have direct access to the straight 30-year UK government bond as an individual security. So let us look at the performance of the 10+ maturities Gilt index. The short-term bonds in the index dampen the losses, as shorter-term bonds are less exposed to big interest rate moves than long-term bonds. As such, the loss from August to now on the 10+ maturities Gilt index is 13 per cent, and from 4 November to now is 4 per cent.
As I write this week’s column, I am sitting in a Glasgow pub, enjoying my first foray into black pudding. Perhaps we investors must accept the unexpected realities of markets in the coming months and the new year.
Government bonds have enjoyed 30 years of gains, so along with gilts in a portfolio, it may be worth considering uncorrelated, alternative investments that provide either duration protection or positive returns when Gilts fall, or both.
The Hedge Fund Return index, which is a broad tracker of alternative strategies (equity-hedged, relative value, event driven, macro) is a good example of alternative-type strategies we can use as a comparison.
In its performance history over the past 15 years, in the months when the average bond return was negative, the Hedge Fund Index has actually risen - perhaps something to consider with gilts as sensitive to yield moves as they are now.
Anyone in Harrogate on Thanksgiving? I'm there on the 24th and might have Yorkshire puddings with my turkey.
Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management
