There's a Notable Trend: Many investors, spooked by predictions of a market crash and anxiety over rates/inflation, are moving significant money from stocks to bonds.
Worries Aren't Irrational: Short-term stock market risks (e.g., AI stock hype) are real, and bonds legitimately provide safety and lower volatility.
The Biggest Risk is "Opportunity Cost": The primary danger of a major shift is sacrificing long-term returns. The editorial provides data: ~12.2% avg. annual return for S&P 500 stocks vs. ~1.87% for corporate bonds over the past decade.
Selling Has Real Costs: Liquidating stocks, especially winners, can trigger a large, immediate tax bill on capital gains.
Portfolio Models Shift: The classic 60/40 stock/bond split is being questioned, but new complex models (like 50/30/20 with private assets) bring new risks, particularly a lack of liquidity.
Reaffirms Core Principles: The solution is not market-timing, but sticking to proven principles: a long-term horizon (5+ years), reinvesting gains, diversifying (which includes bonds), and staying invested.
The Key Takeaway
Don't let short-term fear derail your long-term wealth plan.
This article is your coach telling you to stay in the game. It acknowledges the nervous headlines but argues that a panic-driven move from stocks to bonds is likely a more costly mistake than riding out market volatility.
Your Action-Oriented Checklist:
✅ Review, Don't React: If you're nervous, review your personal financial plan and time horizon, not just the headlines.
✅ Rebalance, Don't Abandon: If your target stock allocation has drifted down, consider strategically rebalancing by buying more stocks at lower prices, rather than selling what you have.
✅ Check Your Balance: Ensure you have an appropriate mix of stocks and bonds for your age and goals. Bonds provide necessary stability; the editorial warns against over-correcting, not against holding bonds.
✅ Mind the Tax Man: Before selling any long-held winners, calculate the potential tax impact.
✅ Tune Out the Noise: Focus on the fundamentals of the companies you own. Are their long-term prospects intact? This is more important than daily price swings.
In essence, the article advises that discipline and a long-term perspective are your greatest advantages.The "safety" of bonds comes with the very real cost of significantly lower growth potential over time. Your job as an investor is to build a balanced plan you can stick with through all market seasons, not to try to switch seats at every bump in the road.
Let's break down the information from the Bloomberg screen and explain its practical implications for an investor.
How to Read This Data
This is a snapshot of UK government bond (known as "gilts") yields at a specific moment in time.
UK 2-Year Yield: 3.784 (+0.019)
UK 10-Year Yield: 4.524 (+0.030)
UK 30-Year Yield: 5.369 (+0.049)
Here's what each part means:
The Bond Term (2-Year, 10-Year, 30-Year): This refers to the time until the bond matures. A 2-year bond is a short-term loan to the government, while a 30-year bond is a long-term loan.
The Yield (3.784%, 4.524%, 5.369%): This is the annual return an investor can expect to receive if they buy the bond at its current price and hold it to maturity. Crucially, bond prices and yields move in opposite directions. When the price of a bond falls (due to selling pressure), its yield goes up, and vice-versa.
The Change (+0.019, +0.030, +0.049): This shows how much the yield has changed from the previous closing level, in percentage points. A positive number means yields have risen today. Since yields rise when prices fall, this indicates that the prices of UK government bonds are falling across the board in this trading session.
Key Observation: The data shows a "steepening yield curve." Yields are rising for all bonds, but they are rising more for longer-term bonds (30-year is up 0.049) than for shorter-term bonds (2-year is up 0.019). The 30-year yield is also significantly higher than the 2-year yield.
How This Affects an Investor's Investments
Movements in government bond yields are a fundamental driver of all financial markets. Here’s how it impacts different parts of a portfolio:
1. Existing Bond Holdings: NEGATIVE IMPACT
If you already own UK government bonds (or any bonds with fixed rates), their market value is decreasing today.
Why? New bonds are now being issued with higher yields (e.g., 4.524% for 10-year). To make your older bond with a lower yield attractive to a buyer, its price must fall until its effective yield matches the new, higher market rate.
2. Stock Market: GENERALLY NEGATIVE PRESSURE
Higher Discount Rate: Companies are valued on the present value of their future cash flows. Higher bond yields mean a higher "discount rate," making those future earnings less valuable today. This tends to lower stock prices, especially for growth and tech stocks whose valuations are more dependent on long-term earnings.
Competition for Capital: Why take a risk on a volatile stock if you can get a safe, guaranteed 5.37% from a 30-year government bond? Rising yields make bonds more attractive, drawing money out of the stock market.
Higher Borrowing Costs: Companies borrow money to expand. Higher interest rates (driven by higher bond yields) make this more expensive, which can hurt their profits and slow down economic growth.
3. Savings and New Investments: POSITIVE for Future Lenders
If you are looking to buy bonds or put money in savings accounts, rising yields are good news. You can now lock in higher, safer returns for the future.
Banks will eventually raise the interest rates they pay on savings accounts and certificates of deposit (CDs), as they are influenced by these government bond rates.
4. The Economy: SLOWING EFFECT
Rising yields make mortgages, car loans, and business loans more expensive. This cools down consumer spending and business investment, which can help control inflation but also risks slowing the economy too much, potentially leading to a recession.
How to Use This Knowledge Profitably
This isn't just academic; it's a tool for making strategic decisions.
1. Asset Allocation (Where to Put Your Money)
Scenario: You believe yields will continue to rise (a "bear steepener" as we see here).
Action: Be cautious on long-term bonds, as their prices will fall the most. Favor short-term bonds or floating-rate notes, which are less sensitive to rate changes. You might also reduce exposure to expensive growth stocks.
Scenario: You believe the economy is heading for a slowdown and the central bank will cut rates.
Action:Lock in long-term yields like the 5.37% on the 30-year bond if you think they are near their peak. If rates fall later, the price of your long-term bond will rise significantly, giving you a capital gain on top of the high yield.
2. Sector Rotation within Stocks
Avoid: Sectors that are highly sensitive to interest rates, like real estate (REITs), utilities, and high-growth technology. These typically underperform when yields rise rapidly.
Favor: Sectors that can benefit from a stronger economy or higher rates, such as financials (banks make more money on the spread between borrowing and lending when rates are higher), energy, and some consumer staples.
3. A Signal for Economic Health
A steepening yield curve (long rates rising faster than short rates) can signal that investors expect stronger long-term economic growth and/or higher inflation in the future. It's your job to decide if that's a good environment for your specific investments.
4. A Buying Opportunity
If you are a long-term investor and believe this is a temporary spike, a sell-off in the bond market can be a chance to "buy the dip" and lock in attractive yields for your portfolio's income-generating portion.
Summary
The Bloomberg screen tells you that the UK bond market is selling off today, especially at the long end, driving borrowing costs higher. This is generally negative for existing bonds and stocks in the short term, but positive for savers and new investors seeking yield.
Profitable use of this knowledge involves:
Understanding the trend: Are yields rising or falling?
Adjusting your portfolio accordingly: Shift between stocks and bonds, and within those categories.
Using it as an economic indicator: Gauge the market's expectation for growth and inflation.
Always combine this data with other economic indicators and your own investment goals and risk tolerance before making decisions.
What does the bond market turmoil mean for investors?
US Treasuries have suffered the worst start since 1788 after falling by 9.8 per cent this year, triggering experts to question the 60/40 portfolio strategy
The bond market has suffered a record $10 trillion sell-off this year. AP
Investors fretting over this year’s $13 trillion global stock market crash may have overlooked similar carnage in a market that is actually more important for the global economy.
The bond market has also suffered a record $10tn sell-off and this could hit investors just as hard because a strange thing is happening.
Both shares and bonds are crashing at the same time. That is something financial experts say isn’t supposed to happen.
But in 2022, it is. Which means there is no hiding place for investors in this troubled year. There may also be an opportunity, if you are sharp.
Retail investors may pay little attention to the bond market but institutions and governments have been known to obsess over it.
For them, the bond market is the big one. It is about triple the size of the global stock market and plays an essential role in keeping economic activity ticking. At the end of last year, the bond market was worth about $120tn, against $41.8tn for global shares.
If the bond market gets bumpy, everybody is in for a rough ride.
Governments issue bonds to raise money for their spending while companies use them to generate the funds they need to grow. Both promise to pay investors a fixed rate of interest over a preset term, with a guarantee to return their original capital afterwards.
At maturity, the issuing government or company must repay the debt. If it cannot, there is trouble.
Bonds are traded by investors, which means their value can constantly change, depending on factors such as inflation, interest rates and demand. As is the case with shares, bond prices can rise and fall. Just not as much. Usually.
Ordinary investors rarely buy individual bonds but invest through a fund holding a spread of government or corporate bonds.
Bonds offer them a fixed rate of interest plus capital growth if prices rise, with fewer of the ups and downs you find with shares.
The two are supposed to be non-correlating assets. So, when shares fall, bonds are supposed to mitigate losses by standing firm.
The one thing they are not supposed to do iscrash simultaneously. Yet, that is what is happening right now.
For decades, financial planners said the safest way to generate steady, strong long-term returns is to invest 60 per cent of your money in shares and 40 per cent in bonds.
The classic 60/40 portfolio strategy has generated an impressive average return of 11.1 per cent a year over the past decade.
You can even buy exchange-traded funds (ETFs) that automatically deliver this, such as the BlackRock 60/40 Target Allocation Fund or the Vanguard 60% Stock/40% Bond Portfolio.
The writing was on the wall for the 60/40 strategy last year, as US large-cap stocks hit record-high valuations, while US Treasury government bond yields neared record lows.
“For all intents and purposes, we think investors have many reasons to be concerned that the 60/40 might be dead,” Nick Cunningham, vice president of strategic advisory solutions at Goldman Sachs Asset Management, said last October.
This will hit investors who had even never heard of the 60/40 rule because “we see shades of the classic 60/40 present in many portfolios due to an over-concentration in the most familiar asset classes", Mr Cunningham added.
As this warning proves prescient, it may be worth looking at your portfolio to see how exposed you are to this double jeopardy.
This has been a challenging year across the board, says Jason Hollands, managing director of investment platform Bestinvest.
“2022 has seen one of the worst starts to a calendar year for core US assets on record,” he says.
US Treasuries have suffered the worst start to a year since 1788, according to Deutsche Bank, falling 9.8 per cent. Bloomberg
US Treasuries have suffered the worst start since 1788, according to Deutsche Bank, falling by 9.8 per cent. That isn’t supposed to happen to the bond market.
“At the same time, the S&P 500 Index of US shares has fallen 20.38 per cent, the worst first half for US equities since the Great Depression in 1932,” Mr Hollands says.
This is happening because central banks, led by the US Federal Reserve, are throwing monetary policy into a sharp reverse.
After decades of slashing interest rates and pumping out stimulus, they are tightening as fast as they dare to curb inflation.
“Central bankers have now yanked away the key supports for equity and bond markets that turbocharged them in 2020 and 2021,” Mr Hollands says.
Rising interest rates are bad news for shares because higher borrowing costs squeeze both businesses and consumers, hitting profits.
Bonds suffer because they pay a fixed rate of interest, which looks a lot less attractive when rates are rising and investors can earn higher yields elsewhere.
The stock and bond sell-off isn’t over yet despite signs of a recovery in recent days, says Fawad Razaqzada, market analyst at City Index and Forex.com.
Optimists convinced themselves that the Fed would curb rate increases for fear of tipping the US into recession, but this is a misreading.
“The Fed is in a hawkish mood. I think the start of another equity and bond market sell-off is nigh,” Mr Razaqzada says.
It is not all bad news, though.
Bonds do this odd thing that sometimes confuses private investors. When bond prices fall, yields rise.
While the bond price crash is bad news for existing holders, new bond investors are earning a higher rate of income. Yields on 10-year Treasuries have almost doubled from 1.63 per cent to 3.06 per cent this year.
Stock and bond market crashes have one thing in common. Both can throw up opportunities for forward-looking investors.
The Fed will continue to raise rates this year but it also wants room to cut when the US economy slips into recession as a result, probably in 2023, says Lisa Emsbo-Mattingly, managing director of asset allocation research at Fidelity Investments.
“If inflation comes down, real rates, which are yields minus the rate of inflation, could rise further into positive territory after being below zero for the past two years,” she says.
This would allow government bonds to carry out their old job of providing a steady level of income for lower-risk savers and pensioners. Bonds could then start making a meaningful contribution to that balanced 60/40 portfolio split again.
Bonds are cheaper than they were after this year’s dip and are starting to look better value for money.
It could soon be time to start buying bonds again, ideally before the Fed starts cutting rates next year to reverse the recession, at which point bond yields will fall again, Ms Emsbo-Mattingly says.
“But the window of opportunity for yield-seekers may be brief,” she says.
There are hundreds of bond ETFs to choose from, including iShares Core 1-5 Year USD Bond ETF, iShares Global Government Bond UCITS ETF (IGLO) or db x-trackers II Global Government Bond UCITS ETF.
Accurately timing bond fund purchases is no easier than timing the stock market, yet recent volatility is throwing up an opportunity.
The retreat from government bonds was more emphatic during the so-called "taper tantrum" of 2013, analysts say. Photo: Bloomberg
The recent sell-off in bonds around the world has driven yields to year-to-date highs, prompting calls of a "correction" and "rout" as traders and investors unwind positions built up over more than a year.
However, as dramatic as recent movements have seemed, yields are still low by historical measures, say economists.
They also say any further sustained yield increases would have to reflect real economic fundamentals, such as improving growth or changing inflation expectations in Europe and the US.
With retail data this week confirming the spluttering nature of the US economic recovery, and the European comeback still fragile, implied bond returns will ease back, they say.
"Viewed over short horizons, the surge in yields is dramatic," says Capital Economics' Paul Ashworth. "From trough to peak, 10-year government yields in the US, UK and Germany have risen this year by around 70 basis points.
"Step back a bit, though, and these moves pale into insignificance," he said.
The current 0.72 per cent yield on the benchmark 10-year German Bund, for example, looks tiny beside a five-year high of 3.49 per cent in April 2011.
In any case, the retreat from government bonds was more emphatic during the so-called "taper tantrum" of 2013, when the US Federal Reserve announced it would begin scaling back its $US70 billion a month bond-buying, or quantitative easing, program.
"The 2013 surge was much larger and it was ultimately reversed," Mr Ashworth said.
Australia's Clime Asset Management has also urged investors not to over-react to the recent bond market correction by dumping yield stocks in favour of equities that typically do better when economies are growing.
It, too, argues that while the recent bond market sell-off was overdue, it has also been overdone.
"A lot of people – commentators and investment banks – are telling investors to get out of yield stocks and get back into growth," Clime said in a note.
"Their reasoning is that bond yields usually rise following a recession as the market predicts an economic recovery and inflation.
"But we don't think this bond correction is indicative of a surge in inflation around the world, or a growth cycle recovery," it says. "The correction was simply indicative of a mispriced bond market."
This view has become the mantra among an array of fixed-income specialists, many of whom foresaw the current volatility in fixed income and currency markets.
They argue that the correction, partly brought on by short-selling tips from a line-up of bond market luminaries, reflects more the easing of disinflationary pressures around the world than the emergence of inflation.
A sustainable pick-up in growth rates would have to crystallise before bond yields settled into an upward trajectory.
For Australia, the bond sell-off, along with recent weakness in the US dollar, has created a new headache for Reserve Bank governor Glenn Stevens, who is keen to see a lower domestic currency.
Rather than follow convention and fall, the Aussie has climbed more than 3 per cent since the RBA cut the cash rate, for a second time this year, last Tuesday. The local unit hit a new four-month high of US81.29¢ in early local trade on Thursday, as the implied yield on the 10-year government bond climbed back above 3 per cent, compared with 2.3 per cent a month ago.
"While this international [bond] sell-off was in full swing, the RBA cut rates but dropped the explicit easing bias, thereby kicking an own goal with regard to policy objectives," said Charlie Jamieson from Jamieson Coote Bonds.
"It is a staggering move that seemingly uses monetary policy ammunition but achieves none of the stated policy objectives.
"The currency has spiked higher, rates have sold off and widened on cross market, equities sold off on higher rates, bank funding costs have risen, and property continues to bubble up in noted Sydney and Melbourne markets."
National Australia Bank's global co-head of foreign exchange strategy Ray Attrill agrees there is little relief in sight for those wanting a weaker Australian dollar.
"We still think foreign exchange intervention prospects – from the RBA in particular – are very low, but that unless and until the US dollar perks up alongside better data, there is little prospect of a meaningful near-term reversal in the Australian dollar."
Former Federal Reserve chairman Alan Greenspan says the stock market has room to rise from record levels. “In a sense, we are actually at relatively low stock prices,” Mr Greenspan, who guided the central bank for more than 18 years, told Bloomberg Television overnight. “So-called equity premiums are still at a very high level, and that means that the momentum of the market is still ultimately up.” The Standard & Poor’s 500 Index advanced 23 per cent this year through yesterday, pulling within a percentage point of its 23.5 per cent surge in 2009, amid speculation the Fed will delay cuts to its monthly bond purchases until the labour market improves. Mr Greenspan said the stock market was “just barely above 2007” and the average annual increase in stock prices “throughout the postwar period” was 7 per cent, which leaves room for a rise.
“Price-earnings ratios are not hugely up,” he said. The market has “gone up a huge amount, but it’s not bubbly,” according to Mr Greenspan. Mr Greenspan, 87, served at the Fed during an era dubbed the “Great Moderation” for its economic stability. In a December 1996 speech, after seven straight quarters of gains in the S&P 500, Mr Greenspan posed a question about how the Fed can know “when irrational exuberance has unduly escalated asset values.” In the final years of Greenspan’s term, which lasted from 1987 to 2006, a massive housing bubble developed as home prices more than doubled between 2000 and 2006, according to the S&P/Case-Shiller home price index. Mr Greenspan said today’s housing market doesn’t show the same conditions as it exhibited leading up to the housing crash, and is lending stability to the US economy. “The level of construction has come up quite substantially, but it’s still only a third of where we were at the previous top,” Mr Greenspan said. “While housing has been a major contributor to what stability we have in the economy, it has not moved considerably.” Purchases of new US homes rose in August, capping the weakest two months this year, showing the fallout from mortgage rates at a two-year high is cooling the real-estate rebound. Sales increased 7.9 per cent to a 421,000 annualised pace following a 390,000 rate in the prior month that was less than previously estimated, Commerce Department data showed September 25.
Mr Greenspan also praised Fed vice-chairman Janet Yellen, whom President Barack Obama has nominated as the next head of the central bank, both in the Bloomberg interview and in an earlier interview on CNBC. “She’s a very bright lady,” Mr Greenspan said of Ms Yellen on CNBC. “I think she will surprise everybody, I mean in a positive way.” Bloomberg
BIS fears fresh bank crisis from global bond spike
Soaring bond yields across the world threaten trillion of dollars in losses for investors and a fresh financial crisis unless banks are braced for the shock, the Bank for International Settlements has warned.
The Swiss-based institution said losses on US Treasury securities alone will reach $1 trillion if average yields rise by 300 basis points, with even greater damage in a string of other countries.The loss could range from 15pc to 35pc of GDP in France, Italy, Japan, and the UK. “Such a big upward move can happen relatively fast,” said the BIS in its annual report, citing the 1994 bond crash.
“Someone must ultimately hold the interest rate risk. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.”
The warning comes after US Federal Reserve set off the most dramatic spike in US borrowing costs for over a decade last week with talk of early exit from quantitative easing (QE), sending tremors through the global system.
The yield on 10-year Treasuries has jumped 80 basis points since the Fed began to talk tough two months ago, closing at 2.51pc on Friday.
The side-effect has been a run on emerging markets, a reversal of hot-money inflows into China, and fresh debt jitters in Portugal, Spain, and Italy. Nomura said the US yield spike threatens to “expose the cracks in Europe once again” and short-circuit the US housing recovery.
The BIS, the lair of central bankers, said authorities must press ahead with monetary tightening regardless of bond worries, warning that QE and zero rates are already doing more harm than good. The longer they go on, the greater the dangers.
“Central banks cannot do more without compounding the risks they have already created,” it said in what amounts to an full assault on the credibility of ultra-stimulus policies.
Describing monetary policy as “very accommodative globally” , it warned that the “cost-benefit balance is inexorably becoming less and less favourable.”
The BIS appeared call for combined monetary and fiscal tightening, prompting angry warnings from economists around the world that this risks a second leg of the crisis and perhaps a slide into depression.
“It is a resurgence of extreme 1930s liquidationism. If applied this would do grave damage to the world economy,” he said.
Marcus Nunes from the Fundação Getúlio Vargas in São Paulo said the report “reeks of Austrianism”, referring to the hard-line view of the Austrian School that debt busts lead to `creative destruction’ and should be allowed to run their course.
Prof Nunes fears a repeat of 1937 when premature tightening aborted recovery from the depression. “What is implicitly proposed is a degree of fiscal and monetary contraction that would make 1937 feel like a ‘walk in the park on a sunny day’.
The BIS said monetary stimulus has created a host of problems, including “aggressive risk-taking”, “the build-up of financial imbalances”, and further “misallocation of capital”.
It said the central bank mantra of doing “whatever it takes” to boost growth has outlived its usefulness, and has left the Fed, the Bank of England, and others, stuck with $10 trillion in bonds. “Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances,” it said.
The emergencies policies have bought time for governments to put their budgets in order and tackle the deeper crisis of falling productivity, but this has been squandered. The BIS said leaders have put off the reforms needed to clear out dead wood and unleash fresh energy. Productivity growth in the rich states has dropped from 1.8pc between 1980-2000, to 1.3pc from 2001-2007, to just 0.7pc from 2010-2012. It has turned negative in Britain and Italy.
“Extending monetary stimulus is taking the pressure off those who need to act. In the end, only a forceful programme of repair and reform will return economies to strong and sustainable real growth,” it said.
Piling on the pressure, the BIS said to call for draconian fiscal tightening to avert a future debt crisis across the big industrial economies, with Britain needing to slash its `primary budget’ by up to 13pc of GDP to meet ageing costs.
“Public debt in most advanced economies has reached unprecedented levels in peacetime. Even worse, official debt statistics understate the true scale of fiscal problems. The belief that governments do not face a solvency constraint is a dangerous illusion. Bond investors can and do punish governments hard and fast.”
“Governments must redouble their efforts to ensure that their fiscal trajectories are sustainable. Growth will simply not be high enough on its own. Postponing the pain carries the risk of forcing consolidation under stress – which is the current situation in a number of countries in southern Europe.”
The call for double-barrelled fiscal and monetary contraction is remarkable, challenging the widely-held view that easy money is crucial to smooth the way for budget cuts and deep reform.
The BIS is in stark conflict with the International Monetary Fund and most Anglo-Saxon, French, and many Asian economists, as well as the team of premier Shinzo Abe in Japan. What is emerging is a bitter dispute over the thrust of global economic policy at a crucial moment.
Critics say the BIS is discrediting monetary remedies before it is clear whether the West is safely out of the woods. It may now be much harder to push through fresh QE if it turns out that the Fed has jumped the gun with talk of early bond tapering.
Scott Sumner from Bentley University said the BIS is wrong to argue that delaying exit from QE and zero rates is itself dangerous. The historical record from the US in 1937, Japan in 2000, and other cases, is that acting too soon can lead to a serious economic relapse. When the US did delay in 1951, the damage was minor and easily contained.
Prof Sumner warned that Europe risks following Japan into a deflationary slump if it takes the advice of the BIS and persists with its current contraction policies.
