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The recent decline in government bond yields is a gift for any fund manager who cares about market risks ranging from geopolitics to leverage.
True, the first quarter of this year was not fun for government bondholders, who fell in price. largest scale in four decades. But the bondholders took one for the team.
The setback means that, as does Russia and the US once again lock horns, and like the Archegos imploded raises concerns about the potential systemic risks arising from the abundant global leverage, government bonds again offer a safety net.
Led by the U.S.-type market, the world’s largest and base on global asset prices, bonds fell in the first months of 2021, fearing the possibility of higher inflation as the world economy emerges. of the pandemic blockades.
Bondholders were frightened by the notion that oversized fiscal stimulus packages, especially in the United States, could lead to a rapid enough rise in consumer prices that regular fixed bond yields appear to be declining or even that central banks may indicate intention to brake their brakes. an essential monetary support, really the material of investors ’nightmares.
For some fund managers, yields remain too low. But for others, they are now high enough to cushion mixed portfolios against various risks and to act as a buffer that has helped produce a respite from volatility.
At the longer end of the maturity spectrum, 30-year U.S. debt now generates 2.3%. This is towards the lower end of the range that has prevailed for most of the past decade. But compared to the 0.7% collapse in the darkest days of the 2020 coronavirus crisis, and the 1.3% area it held for most of the year, it is positively prodigious.
This provides investors with a super safe asset that they can use to balance risks in other areas. Eric Lonergan, M&G Investments’ macro hedge fund manager, said he has incorporated 30-year debt to the U.S. into his portfolio as it now offered “diversification margin.”
“You don’t care about diversification when things are going well,” he said. “You care when something goes wrong. Right now I have a high degree of confidence that if that happens, the Treasury will be fine. It is an insurance against anything. . . except for much higher inflation in the United States. ”
Global stock market indices remain at or near record highs and, without a bizarre change in central banks’ approach, appear destined to continue to rise. But geopolitics, including the clashes between Russia and Ukraine, and China and Taiwan, or acts of God as natural disasters, can always spring up and rush into safe recesses that will rise in price when the situation gets tough.
But not only the acts of God and politicians are playing into the minds of investors. Some also point to the recent outbreak of the Archegos Capital Management family office as sign that markets are full of unstable excesses.
Bill Hwang’s archers failed largely due to leverage. Seva bets they were too concentrated, leaving it stranded when a stock fell. But the incident hit harder because the bets were charged on the loans. The rampants use of the total return swaps, which allow users to bet on a share price without owning the shares, meant that it actually rented the balance sheets of investment banks on a striking scale.
Considered alongside the increase in trade by inexperienced amateurs in January (sometimes again, using leverage, albeit on a much smaller individual scale) and the relentless frenzy of cryptocurrencies and even l digital art, it is easy to build a case that the cash ocean gliding around the global system could easily and unexpectedly dump some ships.
“We should not underestimate how, in an increasingly interconnected global financial system,‘ things are happening, ’” wrote Steven Major, chief analyst at HSBC Bonds and one of the loudest voices in favor of continued bond demand. of investors.
“There is too much leverage in the system, which may not be visible until nothing happens. And when these shocks come, money flows to the safest shelters, and US government bonds are invariably the first choice. ”
It may be too gloomy. Good specialists, after all, thrive on destiny: it’s their job to think of things that can go wrong. And leverage between banks and regulators is already being reconsidered. Still, it’s not hard to imagine that leverage is gaining strength as an urgent global concern and that bond markets are picking up pace.
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