Almost certainly, yes. With 10-year German bond yields having turned negative, there is now $11 trillion worth of sovereign debt around the world that yields less than nothing. And yet there has never been more debt in the system. The word “madness” springs to mind. If we ever see proper inflation, trillions will be put to the torch. The problem, as bond fund manager Bill Gross inadvertently expressed six years ago, is one of timing. Back then, gilts were, in his view, “resting on a bed of nitroglycerin”. Ten-year gilts then yielded 4 per cent. They now yield just over 1 per cent. And our national debt is now 60 per cent higher than it was in 2010. The madness can clearly persist. Japanese bond yields, for example, have been falling for well over two decades. The answer, we suggest, is two-fold: a) avoid bonds at all costs; b) favour compelling and defensive value opportunities from the world’s stock markets instead.
Charlie Diebel, head of rates at Aviva Investors, says No.
There is little doubt that fixed income markets are at extreme valuation levels at this point in time, but are being driven by exceptional forces and exceptional risks. This confluence of events arguably does not make the current level of yields that surprising. Take the European Central Bank bond buying programme and Japanese QE. The bulk of new issuance is already heading for central bank balance sheets and, in turn, leaves a paucity of supply for conventional investors, who continue to have investment needs. By historical comparison, it is clear that valuations are extreme and, if economic and geo-political risks normalise, then no doubt bond market yields will normalise as well. The issue is that the sequence of macro risks still facing the globe, along with more idiosyncratic geo-political risks, makes it hard to foresee such a normalisation within the investment time horizon. Markets can remain “irrational” for longer than any investor can remain solvent. This is the main lesson of the post global financial crisis world.