Bonds On The Upswing

It makes rational sense to everyone, yet no one wants to believe me emotionally. I’m talking about my positive outlook on the future development of bonds. Before the great financial crisis of 2008/09, bond fans happily snapped up papers from solid issuers yielding 4-5% over 5 years. Inflation averaged 2-3% in the prior two decades. This preserved purchasing power after costs and taxes – about the best one can expect from a relatively safe investment. 

Then the world changed and the long winter of zero interest rates arrived. It became particularly cold in Europe and interest rates even fell below zero. In Austria, for example, 5-year government bonds remained below the Celsius freezing point from the end of 2015 to the beginning of 2022. Only in 2018 did the yield curve occasionally poke above the threshold, only to plunge right back down again.

The big turnaround came in 2022. Yields burst above the zero line, climbing above 1%, then 2%, ultimately surpassing 3% per year just a few weeks ago in October. A mixed bond portfolio of government bonds, corporate bonds and covered bonds suddenly offered interesting yields in the 4-5% range again. Our Gutmann global bonds strategy with its broad diversification across regions, countries and sectors, was no exception. 

What does that mean exactly?

At the time of writing, the return on our very own bond strategy stood at 4.3% with an average remaining maturity of around 5 years. So  we as investors have returned to pre-financial crisis territory. If we simply clipped coupons without making any changes, we would roughly generate this return over the next 5 years. 

Naturally this hinges on solvent issuers who also repay the borrowed capital. This is why our analysis in the Chief Investment Office is very important before selecting individual bonds. Additionally, we pursue extensive diversification in the Gutmann bond strategy to minimize possible risks associated with individual securities.

Rationally, this is easy to comprehend, circling back to my opening statement. Yet doubts linger on an emotional level, since bonds have faced persistent headwinds for so long now. While 2023 is currently positive at 2% in the Gutmann bond strategy, this is no cause for exhilaration. Primarily this stems from yields having gradually climbed over the course of the year. And that brings us to the risk for the 12 months ahead. If yields rise from 4.3% today to 5%, 6% or even 7%, bond prices will come under corresponding pressure. After all, every bond must reflect the new interest rate level through lower prices. 

Our outlook is different. We expect 2024 to be a good year for bonds. Perhaps the upswing in bond prices already started in late October? With current longer maturities, the Gutmann global bonds strategy stands to benefit from this, thereby rewarding our clients. At that point, everyone would gladly jump aboard - rationality and emotions aligned.

Note: Past performance or forecasts are not reliable indicators of future results.

You can read the press release of November 16 on the extension of the duration in the global Gutmann bond strategy here.