Kieran Rooney
Evergreen Consultants has released what they believe to be an important new white paper entitled “The Case for Bonds”. The paper, written by Senior Consultant, Kieran Rooney, considers 120 years of history for bond markets.
It explores bond market returns, the term structure of interest rates throughout varying economic and market environments and how bonds are used within the financial system as collateral using data from the beginning of last century.
The paper also considers in some depth the reason why yield curves invert and the signalling that curves can provide us with respect to economic and financial fragilities. These signals can be prescient and are particularly applicable in the present environment.
Rooney says, “The signalling power of the yield curve cannot be underestimated. Correlation of yield curve inversion with future recessions ranges from 75% to nearly 90%, depending on the part of the yield curve being considered.
“Whilst the efficacy of the yield curve suffers from variable lags, yield curve steepening (that is, the movement from an inverted position to a more normal yield curve) is, in our view, the most prescient sign of financial fragility. We believe this has begun in this cycle.
“In our framework and given our research, current market dynamics tell us that there is a non-trivial probability of recession in many parts of the globe over the next year or so.
“In terms of portfolio positioning and as a result of our work, we also believe that the relative risk/reward currently available from high quality bonds are amongst the best market opportunities available.
“We have been incorporating these views, and extending portfolio duration as part of our portfolio construction advice across managed account clients and other clients as opportunities present themselves.
“We believe the bond market will remain volatile as both markets and economies adjust to a world of both ‘higher-for-longer’ inflation and interest rates. It is an environment which very few market participants have seen or understand.
“Nonetheless, we believe that the opportunity in this asset class is the most interesting it has been for many years.”
