A common way to think about bond yields is to view them as a cushion that protects bondholders from the potential negative effects of duration risk. As bond yields have now collapsed to very low levels, that protection from duration risk has vanished.
Some central banks are pushing monetary policy into the upside down world of negative interest rates, but rather than success they are creating bizarre side effects.
Since the early 2000’s the name ‘Mrs. Watanabe’ has been used to describe yield seeking Japanese retail investors, who were forced to increase their offshore investment risk taking in response to ultra-low interest rates back home.
How is it that traditional safe haven assets like gold, government bonds and the Japanese yen are all performing strongly this year, just as risky assets like equities, credit and emerging markets are also doing very well?
Hedonic adaptation is a psychology term that describes the human tendency of reverting to a relatively stable or ‘normal’ state following either positive or negative life changes.
Despite bond yields in many markets getting vanishingly low, inflows to bond funds globally have actually accelerated this year.
With global bond yields back near the low end of recent ranges, it’s an opportune time to revisit a theme that’s relevant to portfolio construction today – the bond vs. equity correlation.
Everyone has an opinion but does anyone really know?
Conventional thinking about bond-equity relationships currently poses a paradox – the resolution to this seeming paradox is the changing bond-equity correlation.
Gopi Karunakaran introduces the ActiveX Ardea Real Outcome Bond Fund (Managed Fund) (ASX:XARO).