It’s been a horrible 3-years for bond / fixed income investors. In short, they have been slaughtered as yields shot higher. For example, losses in long-maturity bonds (e.g. greater than 10 years in duration) are close to historical levels. Consider the all-important US 10-year treasury…. an asset which underpins every financial asset. It has plunged 46% since peaking in March 2020. Put another way, these yields went from ~0.5% at their lows to ~4.8% last week. What we’ve seen in the bond market is one of the most severe market crashes on record. 30-year bonds have plunged ~53%. As a parallel, the equity market crashed 57% during the 2007-09 financial crisis
"Investing Lessons"
History Lessons
History offers us valuable lessons. During the week, I read an interesting Bloomberg article citing research from financial historian Paul Schmelzing. He explained at a Jefferies (Hong Kong) forum that it’s effectively impossible for data from recent decades to offer insight into whether there’ll be a lasting impact on borrowing costs from the pandemic. This is interesting as the popular narrative is rates will remain high for a very long time…. but will they?
Stocks Treading Water for a Good Reason
Stocks cannot get out of neutral. If anything, they appear to be going into reverse. Makes sense… they ripped~ 30% higher in 9 short months. But the risks are increasing as prices rise. This post looks at “equity risk premium”. In short, investors are not being adequately compensated for the risk being taken in stocks (at current valuations) against the risk free return from Treasuries.
Hints of Mid-2007
It’s been said that whilst history doesn’t repeat – it often rhymes. For me, 2023 offers some parallels to 2007. To be clear, things are not exactly the same (they rarely are) – however I will demonstrate some similarities. What’s more, I continue to remain long this market (with about 65% exposure). That said, if I’m correct (and I may not be) – it could raise a ‘red flag’ for 2024. Three things (1) fed monetary tightening takes between 12 and 24 months to make its full impact; (2) the economy also looked very strong into Q4 2007; and (3) sustained inverted yield curve cause recessions. In my view – the market is losing sight of the fact of how long the lag effect can be.
For a full list of posts from 2017…