Resumption of bonds as a buffer against market shocks


The recent surge in government bond yields is a gift for any fund manager worried about market risks ranging from geopolitics to leverage.

It is true that the first quarter of this year has not been fun for holders of government bonds, the price of which has fallen. the largest scale in four decades. But bond bulls took one for the team.

The withdrawal means that just like Russia and the United States tighten the horns, and like the Archegos implosion Raising concerns about the potentially systemic risks stemming from abundant global leverage, government bonds again provide a kind of safety net.

Led by the U.S. rate market, the world’s largest and a base for global asset prices, bonds fell in the first months of 2021, scared of the possibility of higher inflation as the he global economy is emerging from pandemic lockdowns.

Bondholders have feared that oversized fiscal stimulus packages, especially in the United States, could cause consumer prices to rise fast enough that regular fixed bond yields appear to fall or even decrease. that central banks could signal their intention of essential monetary support – really, the stuff of investor nightmares.

For some fund managers, the returns are still too low. But for others, they are now high enough to protect blended portfolios against a range of risks and to act as a buffer that has helped create a respite from volatility.

At the longer end of the maturity spectrum, US 30-year debt is now yielding about 2.3 percent. It 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% square footage it held for most of the year, it is positively sumptuous.

This provides investors with an extremely safe asset that they can use to balance risks in other areas. Eric Lonergan, a macro hedge fund manager at M&G Investments, said he added 30-year US debt to his portfolio because it now offered “a margin of diversification.”

“You don’t care about diversification when the going is good,” he says. “You care when something is wrong. Right now, I am convinced that if this happens, Treasuries will do well. It is insurance against anything. . . except much higher US inflation. “

Global stock indices remain at or near record highs and, without a strange change in attitude from central banks, they appear destined to continue pushing higher. But geopolitics – including clashes between Russia and Ukraine, China and Taiwan – or acts of God like natural disasters, can still erupt and trigger a rush for safe pensions that will rise in price when the going. complicate.

But it’s not just the actions of God and politicians that play on the minds of investors. Some also refer to the recent explosion of the Archegos Capital Management family office as a sign that the markets are littered with unstable excesses.

Bill Hwang’s Archegos failed in large part because of leverage. His Paris were too focused, leaving it stranded when a stock plummeted. But the incident hit harder because the bets were overburdened with loans. The crawling use Total return swaps, which allow users to bet on the price of a stock without owning the stock, meant he was in fact praising investment bank balance sheets on a staggering scale.

Considered alongside the surge in trading by inexperienced hobbyists in January – sometimes, again, using leverage, albeit on a much smaller individual scale – and the relentless frenzy for cryptocurrencies and even digital art makes it easy to build a case that the ocean of cash roaming the world system could easily, and unexpectedly, capsize some ships.

“We should not underestimate how, in an increasingly interconnected global financial system, ‘things are going,’ wrote Steven Major, chief bond analyst at HSBC and one of the loudest voices. in favor of continued investor demand for bonds.

“There is too much leverage in the system, much of which may not be visible until something happens. And when those shocks do occur, the money is funneled into the safest of safe havens, with US government bonds invariably the first choice. “

It may be too dark. Bond specialists, after all, thrive in disaster – it’s their job to think about things that can go wrong. And a reflection on the leverage effect is already underway among banks and regulators. Still, it’s not hard to imagine leverage gaining ground as a pressing global concern and bond markets taking over.

katie.martin@ft.com



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