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Revival of bonds as a buffer for market shocks

Revival of bonds as a buffer for market shocks


The latest emergence of government bond yields is a gift to any fund manager who cares about geopolitics from leverage to market risks.

It’s true that the first quarter of this year hasn’t been fun for government bondholders, as the price has dropped. the largest scale in four decades. But the bond bulls took one for the team.

Going back means that, just like Russia and the US once again block the branches, and as Archego implosion Concerned about the systemic risks posed by having too many levers around the world, government bonds are once again providing a safety net.

Leading the U.S. rate market, the world’s largest and the base of global asset prices, bonds fell in the early months of 2021, terrifying the possibility of higher inflation as the global economy emerges from pandemic closures.

Bond holders feared that high-fiscal stimulus packages, especially in the U.S., could lead to a relatively rapid rise in consumer prices, when regular bond yields appear to be declining or central banks may indicate their intention to touch the brakes. key financial support – really, investor nightmares.

For some fund managers, returns remain too low. For others, they are now high enough to squeeze mixed portfolios against certain risks and act as a buffer that has helped create volatility.

At the end of the maturity, the 30-year U.S. debt yields about 2.3 percent. That’s towards the bottom of the range that has dominated most of the last decade. Compared to the 0.7% fall in the darkest days of the coronavirus crisis in 2020, and compared to its 1.3 per cent year-on-year increase, it is very positive.

This provides investors with a very safe asset to use to balance risks in other areas. Eric Lonergan, the hedge fund macro-manager at M&G Investments, said he is adding 30-year U.S. debt to the portfolio as it now offers a “diversification gap”.

“When things go well you don’t care about diversification,” he said. “You care when something goes wrong. Right now I am very confident that if that happens the Treasury will do well. It’s insurance against anything. . . Except for much higher U.S. inflation. “

Global stock market indices remain at or near record highs and, without making a strange change in the heart of central banks, are in a position to continue to push upwards. But geopolitics – including solutions between Russia and Ukraine, and China and Taiwan – or acts like God’s natural disasters, can always show up and can be rushed in safe retreats when safe prices rise when the trend is strong.

But the actions of God and politicians are not the ones that are playing out in the minds of investors. Some have even pointed to the recent blow to the Archegos Capital Management family office signed that markets are riddled with unstable abuses.

Bill Hwang’s Archegos was largely wrong because of the lever. His bets they were too concentrated, being left stationary when a stock fell. But the incident hit harder because the bets were loaded with debt. Rampant to use among the full swap of returns, allowing users to bet on the share price without owning shares, meant renting the balance sheets of investment banks on an obvious scale.

With the rise of inexperienced amateurs trading in January – sometimes again using the lever, albeit on a smaller individual scale – and the constant madness of cryptocurrencies and digital art, it’s easy to build money on the ocean by sliding the ocean around the global system easily and unexpectedly. can overturn them.

“We shouldn’t underestimate how things are happening in an increasingly interconnected global financial system,” wrote Steven Major, HSBC’s chief bond analyst and one of the strongest voices in favor of continued bond demand for investors.

“There are too many bets on the system, and many of them may not be visible until something happens. And when those accidents happen, the money goes from safe havens to safer ones, with US government bonds always being the first choice.”

That can be sad. Bond specialists ultimately grow up in misery; their job is to think of things that can go wrong. And a rethink on leverage is already underway between banks and regulators. However, it’s not hard to imagine the disturbing lever that is gaining traction as a worldwide concern and the calm of the bond markets.

katie.martin@ft.com



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