How do we interpret rising bond yields / falling pound?
Hi Team - A question for tomorrow. Can you please explain how to interpret rising bond yields / falling pond prices and what are the drivers of these changes? Many thanks. David
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Answer
Hi David,
Rising bond yields are the main game in town with relative valuation the underlying key to asset prices:
- The US S&P500 yields less 2% per annum whereas a US Government 2 & 5-year bond both yield over 4%.
Hence investors need to be confident that equities will deliver a decent degree of capital gain to make them a better investment than the perceived safety of bonds e.g. people should be looking for say an extra 4% plus a few more % “safety net” otherwise parking money in cash makes more sense.
At the moment fund managers are more concerned about stock market declines as opposed to how much they will outperform equities hence the current repricing across financial assets. Post COVID as interest rates / bond yields were at basically zero it was easy to argue equities with sustainable yield were cheap at most levels, this is not the case today hence the ~30% fall across stocks.
The Pound is trading at all-time lows primarily because the $US is soaring as both a safe haven in these uncertain times and a currency delivering a better yield almost by the day. Obviously Cable (market slang for the UK’s currency) has domestic issues with the government & BOE at odds but the picture is very similar for both the Euro and Japanese Yen.
We anticipate that the Pound will bounce with bonds in price (yields down) all at the same time as equities recover some of their losses over the last 12-months.
