When the mood turns

The final quarter of 2018 was a torrid month for investors as a number of fears converged to create panic.

Article updated: 4 February 2019 3:00pm Author: Bryn Jones

Despite the US Federal Reserve (Fed) pulling the trigger on another interest rate hike in December the yield on US 10-year bonds fell from 2.99% to 2.68%, the opposite of what you would expect. In English, investors thought the Fed was being overly hasty with increasing lending costs for households and businesses. Because many people think the central bank is moving too quickly in its attempts to curtail lending, expectations for inflation and GDP growth were dampened. This in turn sends longer-term bond yields lower (and prices higher).

The worries about a Fed mistake were heightened by some poor economic news out of America and disappointing company results which led many to believe that worldwide growth is weakening. A slowdown increases the chances of a global recession and therefore encourages people to sell equities and riskier bonds. Sprinkle a bit of US government shutdown, Trumpian bombast and “Brexit means Brexit” on top and you’ve made yourself a particularly foul version of market eggnog.

But at times like this, it’s always helpful to zoom out a bit and get some context. If you bought some gilts six months ago and then went on holiday, you would have returned on New Year’s Day to find your yield was exactly where you left it. You would also be wondering why everyone was so stressed! This is just a local example of how investors sometimes become overwhelmed by fear and concern, and the markets bounce around in response. We don’t know how the future will unfold, and we would be some of the first to note the number of risks flying around the globe right now. But we see a lot of comforting signs out there too – something that investors tend to ignore when the black dog has taken hold. The US labour market is strong and wages are rising, giving Americans more cash to spend, which tends to be a boon for the whole world. Most US business surveys remain at multi-year highs. In the past, markets have tended to recover once it’s clear that the sky hasn’t fallen in and investors start to account for broadly decent economic data.

Still, we think these bouts of turbulence will become more frequent this year. Talk has come around to the chances of an American recession in 2019. For us, the chances are pretty slim as things stand. However, markets have a habit of becoming self-fulfilling prophesies, so we are keeping a watchful eye on a few choice indicators. Despite reasonable data out of the UK and the US, investors are still fixated on the bum notes out there.

Our fund (Rathbones Strategic Bond Fund) aims to provide lower, but steady, returns that steer a smoother course when markets get choppy. To do that, we invest in a range of debt assets, from government and corporate bonds to funds that invest in more complex parts of the debt markets. By diversifying and minimising or offsetting our risks wherever possible, we try to provide a measure of safety along with steady returns.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Rathbone Strategic Bond Fund
Bryn Jones

Rathbone Strategic Bond Fund Manager

Bryn is the lead manager on the Rathbones Ethical Bond Fund, the Rathbones Strategic Bond Fund and manager of intuitional mandates. He has been a guest speaker at the Euromoney Bond Conference in London, and at the Euromoney Bank Capital Conference in Amsterdam and also appears regularly on CNBC and Bloomberg TV.