The end of the bond market?

Will Leyland, 10 July 2020

As most financial analysts will attest to in times of economic uncertainty, all eyes tend to turn to the bond market to get an idea of where the money is moving. Whilst things are volatile, the money tends to move into perceived safety, and government bonds are certainly an avenue of safety.

Government bonds, put simply, are where the government borrows money and issues bonds for private investors, institutions and central banks to buy with the promise of repayment with interest.

It’s not much different to selling IOU’s at differing lengths of time at differing interest rates. Whilst times are good there is less demand for these bonds as there are better places to put your money for a good return, but whilst things aren’t as certain investors flock to these types of loans.

The amount of demand will often define the yield, which isn’t hugely different to the yield definition in property. As defined by Fidelity, “Yield is the anticipated return on an investment,
expressed as an annual percentage. For example, a 6% yield means that the investment averages 6% return each year. There are several ways to calculate yield, but whichever way you calculate it, the relationship between price and yield remains constant: The higher the price you pay for a bond, the lower the yield, and vice versa.”

Largely it’s a dull endeavour reading and writing about the bond market and is reserved for the financial nerds often found graduating from mathematics degrees before going on to work in the stock market, but it can often give us hints and clues as to what to expect in the future.

If bonds have classically been an indicator of where money turns to in safety, but that market has now dried up, where will it turn to?

The Market Turns

Robert Shiller, probably best known for his book, Stocks for the Long Run, was talking recently about his thoughts on the repercussions of the enormous stimulus recently announced by the Bank of England and The Federal Reserve in the US, who will be pumping trillions into the UK and US economies over the coming months to shield them from the effects of the Coronavirus epidemic.

In talking about why he believes this economic intervention is different to 2008, he likened it to the bank pumping money into the banking system to bring it back from the brink, but this time the money is being placed almost directly into consumer bank accounts, payroll accounts and business accounts.

This, he thinks, will create consumer driven inflation over the course of the coming months with demand increasing markedly, but with businesses struggling to keep up as they slowly re-open and rebuild.

In an article for Money Week, John Stepek wrote “Siegel reckons the 40-year bull market (upward trending) in bonds finally ended in March. We’ll look at that in more detail another day, but that’s hugely important. That means the biggest, most important trend of your investment lifetime (certainly for readers under the age of 80) ended this year.”

So, if the bond market is now essentially over as a safety net, where will the money move to?

Property Investment

It’s far from certain, but looking at recent figures and performance indicators, UK property is by far and away one of the most stable and long-term reliable markets around.

Ok, it’s not quite as reliable as lending the government money, but it’s not far behind and the yields and capital growth far outperform the bond market.

Are we already seeing a largescale shift towards UK property as a replacement for bonds? Possibly, activity is through the roof and there’s a small clue in the fact that mortgage approvals are down but activity doesn’t seem to have moved much.

If nobody is getting a mortgage but houses are still selling, then it’s likely that the market is attracting cash buyers. It’s also instinctively quite an attractive option nonetheless, considering that many people are now coming to terms with spending much more time at home.

The smart money appears to now be moving home itself, out of bonds and into UK residential property.


The end of the bond market?

Will Leyland, 10 July 2020

As most financial analysts will attest to in times of economic uncertainty, all eyes tend to turn to the bond market to get an idea of where the money is moving. Whilst things are volatile, the money tends to move into perceived safety, and government bonds are certainly an avenue of safety.

Government bonds, put simply, are where the government borrows money and issues bonds for private investors, institutions and central banks to buy with the promise of repayment with interest.

It’s not much different to selling IOU’s at differing lengths of time at differing interest rates. Whilst times are good there is less demand for these bonds as there are better places to put your money for a good return, but whilst things aren’t as certain investors flock to these types of loans.

The amount of demand will often define the yield, which isn’t hugely different to the yield definition in property. As defined by Fidelity, “Yield is the anticipated return on an investment,
expressed as an annual percentage. For example, a 6% yield means that the investment averages 6% return each year. There are several ways to calculate yield, but whichever way you calculate it, the relationship between price and yield remains constant: The higher the price you pay for a bond, the lower the yield, and vice versa.”

Largely it’s a dull endeavour reading and writing about the bond market and is reserved for the financial nerds often found graduating from mathematics degrees before going on to work in the stock market, but it can often give us hints and clues as to what to expect in the future.

If bonds have classically been an indicator of where money turns to in safety, but that market has now dried up, where will it turn to?

The Market Turns

Robert Shiller, probably best known for his book, Stocks for the Long Run, was talking recently about his thoughts on the repercussions of the enormous stimulus recently announced by the Bank of England and The Federal Reserve in the US, who will be pumping trillions into the UK and US economies over the coming months to shield them from the effects of the Coronavirus epidemic.

In talking about why he believes this economic intervention is different to 2008, he likened it to the bank pumping money into the banking system to bring it back from the brink, but this time the money is being placed almost directly into consumer bank accounts, payroll accounts and business accounts.

This, he thinks, will create consumer driven inflation over the course of the coming months with demand increasing markedly, but with businesses struggling to keep up as they slowly re-open and rebuild.

In an article for Money Week, John Stepek wrote “Siegel reckons the 40-year bull market (upward trending) in bonds finally ended in March. We’ll look at that in more detail another day, but that’s hugely important. That means the biggest, most important trend of your investment lifetime (certainly for readers under the age of 80) ended this year.”

So, if the bond market is now essentially over as a safety net, where will the money move to?

Property Investment

It’s far from certain, but looking at recent figures and performance indicators, UK property is by far and away one of the most stable and long-term reliable markets around.

Ok, it’s not quite as reliable as lending the government money, but it’s not far behind and the yields and capital growth far outperform the bond market.

Are we already seeing a largescale shift towards UK property as a replacement for bonds? Possibly, activity is through the roof and there’s a small clue in the fact that mortgage approvals are down but activity doesn’t seem to have moved much.

If nobody is getting a mortgage but houses are still selling, then it’s likely that the market is attracting cash buyers. It’s also instinctively quite an attractive option nonetheless, considering that many people are now coming to terms with spending much more time at home.

The smart money appears to now be moving home itself, out of bonds and into UK residential property.