The following is written in all investment books. A conservative portfolio should be formed in the proportion of about 60% stocks + 40% safe bonds. American 10-year Treasuries are great for “safe”. Or 10-year German bonds. One gets the impression that all these books can be deposited in the library. The reality is completely different.
Yields on 10-year US and German government bonds are almost back to the levels they were at the start of the year. U.S. bonds can offer investors a yield of 1.2% p.a. And German bonds show a negative yield of -0.4%. That is, the market is betting that we will soon see a sharp slowdown in inflation and even some deflationary episode from these levels.
But will we see this slowdown in inflation? No one knows that yet. On the other hand, with annual price growth in the USA of 5.4%, American 10-year Treasuries are now showing negative yields of 4% p.a. I guess there is no precedent for this in the history of the last 200 years.
What does this tell us?
1. There is a lot of free money in the markets. And there is simply nowhere to put it. And if anyone thinks there is a bubble in the stock market, we have no idea how much bigger that bubble could get.
2. Some investors are very much afraid. So they are willing to keep buying bonds with huge negative yields. What is the reason for this behaviour?
Let’s imagine that there is an investor or pension fund waiting for the stock market to crash. And he has a spare $10 million on hand. Where would you physically hold the money?
You can’t put it in stocks, because these investors are expecting a fall. But keeping the money in an account with a broker or a bank is even scarier. If a crisis hits, the bank or broker can simply go bankrupt. And the money of these investors will evaporate. On the other hand, if investors have bought government bonds in a brokerage account or through a given bank, there is no risk of bankruptcy for them. The bank or broker can go bankrupt. But the investor’s bonds will stay with him in any case.
How long will this absurd situation continue? We think it looks a lot like a trend that could end at any time. However, it goes on and on.
03.30 Australian retail sales for June
14.30 ADP US private sector employment report for July
16.00 US ISM Services Business Activity Index for July
Important Notes on This Publication:
The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.