Crouching Tiger, Hidden Warning!
Listen up! You might not get too excited about bonds and interest rates but just as gravity pulls everything down on earth, so do rising interest rates affect the value of assets from from stocks to residential property to cotton farms.
As David Buckland warned you HERE the rising bond yields amid declining headline inflation means that real interest rates are rising. In turn this implies investors are expecting rising inflation and rising risks.
The prospect of an orderly unwinding of QE is currently greater than the probability of a disorderly unwinding but under both scenarios expect much higher volatility.
In July 2012 US 10yr bond yields were 1.39 per cent. Last night they hit 2.77 per cent, that’s a doubling in 13 months!!!
So what you ask?
Well, here are just two things to think about:
1) The steepening of the yield curve should be seen as a flashing warning light for investors who are chasing shares for their yield. The yield on Telstra shares might look attractive today but rising bond rates might be for Telstra what a mirror was for Dorian Gray.
2) For QBE the chart below suggests there may be some benefits from tapering QE.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Kelvin Ng
:
Hi Roger, below is the link to an excellent presentation by Hamish Douglass of Magellan Financial on this topic:
http://www.brrmedia.com/event/preview/m4ikselzmb/114777?popup=true
You probably got the uncensored version!
Kelvin
Roger Montgomery
:
Thanks Kelvin. You’re right!
John Emmi
:
You have to imagine there is plenty of complacency in bond markets as rates have been sooo low for so long.
Plus the trillions of money printing – will this finally show up as inflationary?
Roger Montgomery
:
That will depend on how quickly the US economy accelerates. The faster it accelerates the greater the risk of a disorderly unwinding of QE.
john stanning
:
Yes Roger, significant week with big break outs in German, UK and US 20 and 30 year bonds. Just wait for Japan!
Roger Montgomery
:
Indeed John, they might take a little longer to join the rush to the exit.
Andrew Legget
:
Thanks for the insights, as someone who does not agree with investing based on yield alone i will be very interested to see how this affects the market if/when rates go up. I wonder what will ahppen if as you say the yield on some investments is no longer an attractive one. Will there be a big shift out of these companies back into cash and bond investments or will it be more ordelrly. Either way this point was going to be reached as either the prices will continue to go up pushing the yields down or the rates will go up making other yields more attractive. If their was a big shift away from the equity markets based on this then it is not hard to see some companies which are going to be at the flash point of it as all of the yield focused investors tend to congregate on the same companies.
Obviously as the QBE example shows, some companies will benefit due to their business (such as QBE’s US treasury investments paying a higher yeild).