Breaking up with bonds
Since Donald Trump was elected president, nearly $2 trillion has flooded out of the global bond market. Bonds are the traditional investor’s safest asset besides cash. This has been the case for nearly a century because bonds perform with less volatility than the stock market and are backed by governments and institutions. However, trillions of dollars have outpoured form the bond market, confirming that times have changed.A recent article in the Financial Times explains that these dramatic outpours represent a resurgence of the ‘Great Rotation.’ This term was coined five years ago to describe a market trend of investors turning their backs on bonds, pulling out billions of dollars and investing in other markets. It remains up in the air whether the rotation will occur in full force in the following terms, but here are a few reasons to be prepared.
Unique political climates have heightened the market’s growing skepticism of government performance. Triggers include Brexit, which has left investors fearful of the Europe’s economic stability and the results of the United States.’s presidential election. From this global political upheaval,we also see a shift towards fiscal expansion. Donald Trump favors economic policies that will deregulate the U.S. markets in tune with pre-recession standards. The budget statement released by Britain last month highlights similar expansion, indicating a $29 billion fund for infrastructure projects. Government expansion means increased government borrowing, however this debt is not so attractive in a market already tainted with cynicism.
Making matters worse for the bond market are predictions that the Federal Reserve will increase interest rates. In a recent Fortune article, Andrew Sheets, chief global cross-asset strategist at Morgan Stanley, predicts that the Feds will actually raise rates six times between now and the end of 2018. Increased interest rates decrease the value of outstanding bonds. For bond funds, this leads to heavy bleeding. According to Bloomberg, in just the second week of December, bond exchange-traded funds suffered a record $91 million loss.
In reference to a full fledged ‘Great Rotation,’ Michael Antonelli, an institutional sales trader at RW Baird & Co says, “It’s too early to tell, but this is the best chance I’ve seen in a long time.” One thing is for certain, investors are on the hunt for a new place to stash their old bond cash.
Bloomberg Markets indicated that during the second week of December, bond outpours were contrasted by $1.12 trillion new investments to funds that track emerging markets. New and emerging markets will be the ‘dominant driver of global growth’ in 2017, according to 50% of respondents in a survey conducted by Citigroup. With performance drivers that bear little correlation to conventional stock and bond results, alternative investments are capitalizing on this market shift. New innovations make the return potential and correlation benefits of alternative investments more accessible to a broader-range of investors, who are eager to take advantage during uncertain times.
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