As SocGen's Andrew Lapthorne reminds us, the big moves last week were in the bond markets, with numerous bond yields hitting historical lows and many moving further into negative territory. This, he adds, "is no longer yield chasing but a combination of price momentum, economic fear and structural issues."
This is a big problem for savers and anyone else reliant on fixed income for the simple reason that there no longer is such a thing as fixed income.
But there are worse news for long-term investors according to Lapthorne. Much worse.
In fact, according to the SocGen strategist, "for long-term investors the outlook is dire." Here's why:
The following chart plots the excess return from investing 100,000 US dollars for 20 years in a balanced portfolio consisting of 50% MSCI World, 40% global sovereign bonds, 5% cash and 5% corporate bonds. We show the gross amount and a net amount assuming investment charges and costs of 100bps. The figures are simply based on investing for 20 years at the prevailing yield.
If you invested today for 20 years the after cost excess return might be $21,800 (today’s yield on a balanced portfolio is just 199bps minus 100bps) versus $60,000 if you invested 10 years ago – and a $150,000 30 years ago. Of course inflation rates are much lower today than they were 30 years ago and trading and management costs are coming down. But you can’t escape the obvious conclusion: those with large nominal liabilities are going to have to find more money.
Is there any wonder, then, why capital markets are not only manipulated by central banks (as the ECB was so proud to demonstrate earlier), but investors no longer have an interest in playing, knowing that at these prices, the most likely outcome is not winning?