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Bonds show it pays to be boring
UNABLE to stomach turbulence driven by the escalating conflict between China and the United States, and leery of a darkening outlook for the economy, investors have been exiting the stock market and buying bonds, the traditional place to park cash during times of uncertainty.
The rush has turned parts of the ordinarily boring bond market into a better bet than stocks. The gains are unusual; by some measures, bonds are having their best year since 2002. And they do carry risks for investors who are buying now. If the concerns that have lured investors into the bond market dissipate - because Washington and Beijing reach a trade deal, for example - then bond prices could start to fall. When investors expect the economy to grow, they typically turn to investments such as stocks that might rise fast.
But lately, the S&P 500 has been on a jagged path as bad news on the global economy, or sudden threats and escalations by President Donald Trump or the Chinese government, have unsettled investors. The upshot of these swings is that, even with a decent gain this year, the stock benchmark is roughly unchanged from where it was in early 2018. "For a lot of clients, they feel like they've just been bouncing up and down, and stocks are not going much of anywhere," said Michael Ball, president of Weatherstone Capital Management, an asset manager based in Denver. "That gets people on edge."
For investors weary of such volatility, bonds have become a go-to alternative. Bond prices do not fluctuate as much as stocks, and the returns they offer are typically more certain than those of many other investments. On top of the interest payments companies are obligated to make, the price of the bond itself can rise - as they have this year - generating an investment gain for bondholders. So, as investors sold almost US$70 billion of stock investments such as mutual funds and exchange-traded funds in the year through July, according to data from the tracking firm EPFR, nearly US$260 billion of cash flooded into vehicles that invest in the US bond market.
Interest rates in places such as Europe and Japan are even lower than they are in the US, making bonds in the US appealing to global investors as well. One of the broadest gauges of the American bond market, the Bloomberg Barclays Aggregate index - the S&P 500 of the American bond market - is sitting on gains of more than 9 per cent, including both interest payments and price appreciation. If it were to finish the year at that level, it would be the index's biggest increase since 2002.
Longer-term bonds have done even better. If you simply bought the 10-year Treasury note at the end of last year, you'd be up almost 13 per cent. In other words, an investment that is seen as virtually risk-free (because repayment is considered guaranteed by the US government) has done as nearly as well as the much riskier stock market. These price gains are the obvious corollary to a feature of the bond market that has received a good deal of attention lately: bond yields, which move in the opposite direction of prices, have fallen sharply. That drop continued on Wednesday, with the yield on the 10-year Treasury note dropping to just under 1.47 per cent. That yield was more than 3 per cent in late 2018.
Despite the reputation of bonds as a low-risk place to park money, if the current headwinds hitting the global economy start to ease up, bonds bought recently could become losers quickly. For many, the noisy political environment is the primary concern. NYTIMES