Are Bonds Back?
Are Bonds Back?
Well, at least this is the view of some fund managers in a recent Bloomberg article from JPMorgan, UBS, & Morgan Stanley who favour a move back into bonds now. Here is their logic.
Firstly, they cite that high-grade dollar bond yields exceed the dividend yields of companies in Morgan Stanley Capital International’s All Country World Index. They cite that the gap has increased by nearly 90 basis points this year and is near the 2008 global financial crisis peak. This is a rare phenomenon in the financial markets where the yields on high-grade dollar-denominated bonds have exceeded the dividend yields of companies in Morgan Stanley Capital International’s All Country World Index. What does this mean? Remember that a bond yield is the rate of return that an investor receives on a bond investment, while a dividend yield is the ratio of a company’s annual dividend payment to its current stock price. The fact that high-grade bond yields have surpassed dividend yields is unusual because, historically, stocks have tended to provide higher returns than bonds due to their higher risk profile.
The widening gap between bond and dividend yields suggests that investors are becoming increasingly concerned about the long-term outlook for stocks and the global economy, and are seeking the relative safety and stability of bonds instead. This is particularly significant given that the gap is near the 2008 global financial crisis peak, indicating that the current economic environment may be similarly uncertain and risky.
This is why Bloomberg quotes UBS’s head of credit saying, “Investors should lock in yield in investment-grade, high-grade and emerging markets sovereign bonds, and consider more selective equity exposure in emerging markets.” So, does this mean that bonds are back? Is this the right time for investors to move more heavily into bonds if they have not done so already? Will this result in a potentially weaker summer ahead of stocks if bond buying is back in a big way? Look at the yield for bonds across the major countries. With yields this attractive, will it attract long-term bond traders convinced that inflation is finally falling?
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