Comment and opinion for retail investors in the UK
I am pausing my mini-series of posts on selecting bond funds for specific objectives to write about some high level issues, because what has been happening in the fixed income markets recently has been so remarkable that it is being described as a ‘first’ by specialist managers with over 30 years experience.
I will pose and answer some questions but would welcome others from readers with a view to publishing the answers in another post. Please use the comments option or email me if you prefer.
My slightly later than usual start to writing this piece has followed a brief recovery spurt in global equity markets, indicating that if there is even the merest hint of a slow down and reversal of the hawkish attitude of the US Federal Reserve, markets are poised and waiting to inflect to a positive or even bull run after a gloomy period now running to almost a year.
The ending of the 12 months since the current bear market got under way will see all the short term data look a bit different because of what is called ‘base effects’. Let me explain.
This post is early because I am away for a few days birdwatching the mass migrations on the edge of the Baltic Sea for the rest of this week. My monthly briefing will conversely be late, but given the political events in the UK, waiting a few days to see what further fallout there is from the special fiscal operation may be wise anyway.
In the post called ‘Getting your Fix, part two’, I proposed 3 possible motives for considering fixed income investments now the market has inflected and all the factors I outlined in part one, plus the recent Chancellor’s proposals in the UK, are in play. This week, I want to see how you would approach research into the market if your objective was the first one I suggested: earning a return on money that would otherwise be in cash.
Sorry if you got a message saying there was a new blog post available only to find it was incomplete.
I hit the Publish button instead of the Save Draft one while writing the piece.
The finished version should be out tomorrow.
I started this series of educational posts by outlining current factors that make fixed income assets a very different proposition to what they were a year or so ago. Since I did that, some factors have been amplified.
The UK markets had been waiting to see what a new leader would do to help people with energy bills and was nervous about the likely impact on the public finances but almost everyone was astonished (even those who approve of the return to Reagonomics) by the special fiscal operation (or Watership Down as some have called it) announced at the end of last week. The impact on fixed income markets has been instant and dramatic with yields rising to levels not since before 2008.
Since I started writing this, the Bank of England has announced that it is reversing its plan to start quantative tightening and going back to money printing. I assume this means that that want to clamp down on inflation by printing money – a novel new economic theory, not exactly as imagined by Milton Friedman and associates!
A decline in the value of Sterling may still turn into a currency crisis and such crises tend to run out of control until they hit the buffers. All this is happening as I write so I have no intention of offering guidance on what to buy and when, or even to say if the fixed income asset class is yet attractively priced (it certainly will be before too long, I guess).
What this week’s post will do is explain how the fixed income market is divided up for access by retail investors. This information can then be matched up with your objective to see what funds universe might meet your needs.
I had been writing about the collapse of bond prices and I will continue to expand my series of posts explaining how to research this market as it becomes cheaper and, as I had I thought , hopefully ‘normalises’.
However, I like everyone else (except perhaps the scribblers at the Daily Mail?) have been truly astonished by the ‘not a budget but still called a mini-budget by everyone’ announced by Mr Kwarting.
There had, in the run up, been suggestions by fixed income market dealers that the expected cost of energy price subsidies would strain the gilt market if the associated levels of extra government borrowing were added to the flow of stock into the market from quantative ‘tightening’. But even those pessimists will have been taken aback by the potential impact of what was announced.
But is it just a cunning plan? Maybe the Chancellor knew that Sterling would bomb (he ought to have done) and thinks that will make British Government debt so cheap that overseas (and maybe a few home) investors will buy it up by the truckload? It might well work, if discounts get big enough to make interest payment in feeble Pounds come at a high enough yield to beat those in strong Dollars.
Personally, I think he and his colleagues are backing the theories of a small number of discredited (some 40 years back) academics who have never worked outside of a university. That is a huge gamble.
Now is, disappointingly, not the time to be buying Sterling assets unless you are very brave. They could end up even cheaper. Is it not odd the the UK government has made it that way? Expect some takeover announcements before long as the private equity vultures go scavenging.