Bonds represents a state of indebtedness, a bond is a loan issued by governments and corporations to finance particular projects such as building roads or research. These bonds can be traded by investors who will then receive the future payments - including interest known as ‘coupons’ - until the bond matures.
Bonds with a fixed interest rate are also known as ‘fixed-income securities’ because the corporation loaning the money can calculate the total sum they’ll receive if a bond is held until it matures.
During a period of high interest rate, bonds can become more lucrative as the yield on bonds increases. If the country’s central bank keeps interest rates low throughout the lifetime of the bond, then the yield isn’t likely to be high so they price of bonds is pushed higher.
Find the latest bond market news with MacroMatters, from rates fluctuations and government policies.
Our Asset Allocation team includes dedicated and experienced strategists whose focus is to forecast the outlook and the stage of the market cycle for their specialist asset class, including bonds and equities. They work alongside our in-house economics team who focus on assessing the underlying macroeconomic environment. Our economists then work with our team of strategists and portfolio managers to translate their views into what this means at a portfolio level.
With the European Central Bank spelling out monetary policy for the next eighteen months, they could be a victim of developments elsewhere. Against a backdrop of slowing Eurozone growth and lacklustre inflation, the US seems likely to hike several times and increase Treasury supply by over $1 trillion, potentially tightening global credit conditions significantly and leaving Europe exposed.
Is there an Archimedes principle at play in financial markets? As central banks withdraw liquidity by shrinking their asset holdings, does it inevitably imply bad news for investors? We look to theoretical, historical and contemporary clues to find out.
Having worked as an equity strategist for well over a decade, I’ve lost count of the number of times I’ve had the debate on ‘what happens to equities when bond yields go up?’. And for most of that time bond yields were in the ice age and falling! To cut down on some future deja-vu, here's my Top 7 list of things to consider about equities when bond yields go up.
What happens when babyboomers retire? Have we saved enough for retirement or are we living beyond our means? Academics argue high savings by prime-aged babyboomers in their 'summer' have depressed real interest rates in recent decades. But the community is split as to what happens next as 'winter' comes.
The UK inflation-linked government bond ('linker') market is dominated by vast UK defined benefit pension schemes. Derisking by schemes tends to increase demand for linkers as equity prices rise, pushing up their prices. For multi-asset investors seeking diversification, that could make them less attractive to buy.
The US yield curve has consistently flattened since the Federal Reserve began tightening monetary policy several years ago. History strongly suggests that this is an entirely normal market reaction to a rate hiking cycle. If short-term interest rates continue to rise at the pace we expect, we could well be looking at an inverted curve by the middle of 2019.