The Run on Bonds
Pfäffikon SZ, Switzerland – Investors have been scratching their heads. The current bull market in stocks is historically coming of age gradually, but I have not been able to spot any cracks, despite the pullback yesterday in Europe. Fact is that the bond investor has been revolting in the recent past. It will not have escaped your attention that at the biggest bond fund in the world – Pimco – the so called “outflow” is taking on serious forms.
Outflow Pimco
This could have to do with the sudden departure of the ex CEO and Co-CIO, whom I respect deeply, Mohamed El-Erian at Pimco. El-Erian is capable of placing everything in proper perspective and on that basis making the correct investment decisions. But the outflow at Pimco – which has been going on for quite some time – can also be rooted in different reasons, namely the end in the thirty year bull market in bonds. Perhaps El Erian was leaving a sinking ship on purpose, although it’s known that he had a clash with founder of Pimco, the “King of Bonds”, Bill Gross.
False Sense
Investors today can change their portfolios with one click of the mouse. This has many advantages – also for yours truly – but makes markets erratic. Since the outbreak of the last financial crisis, investors are in love with bonds. Approximately USD 900 billion flowed to – sometimes very illiquid – bond funds and bond related ETFs. Bonds give investors a false sense of security. The financial industry thankfully uses this information. In the aftermath of the financial crisis the central bankers offer a helping hand by reducing interest rates even further than most had thought possible. But the interest rates are low for a reason, don’t be mistaken. Interest rates are low to force you to do something, the trick is, as an investor, not to fall for it.
End of Tapering
In the US unemployment has been declining quarter after quarter, a clear sign the US economy is picking up steam, which is nice. In October the Federal Reserver (FED) will most likely stop tapering. Even though the FED spoke soothing words this week, a rise in interest rates is coming closer and closer. And ETFs and other interest related products are extremely vulnerable to a hike in interest rates.
Therefore there is a real chance that everyone wants to step out of – illiquid – bond funds and ETFs. The result of this will be unprecedented predatory pricing. It can’t be excluded that some of these funds and markets will be locked down with all the resulting consequences. As investor one must take these risks into consideration and PP at all times. This is part of a sensible investing process.
The Next Crisis
The next crisis is always different from the previous. Almost no one thinks about this and takes it into consideration, because the current crisis is still fresh in our memories. The next crisis could be found in the bond corner. History teaches us that increasing interest rates are always well absorbed by the financial system. For stock investors in particular, an increase in interest rates will result in many interesting opportunities. That does not change the fact that for you as bond investor – and home and mortgage owner – there are multiple “red flags” to be noted.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
