Mohamed El-Erian, a famous economist stated that investors had to use different strategies while investing in overseas bond markets, stating that this asset class ought to be treated as an opportunity, instead of investing a major chunk of their portfolio into them.
For over 30 years, the fixed income bull run has been going on without any signs of stopping. Investors are now rushing to safer countries, due to concerns over economic recessions on the horizon and the China-US trade war.
Estimates made this summer displayed that over $15T worth of fixed government bonds were now trading with negative yields. Yields usually have inverse relationships with bond prices and negative yields mean that investors are basically paying for folding a nation’s sovereign debt. This $15T figure has tripled since Oct 2018, thanks to market expectations that the central banks would continue supporting markets with asset purchases and low rates.
El-Erian was the former head of Pimco, an investment giant, and is currently an Allianz economist. He stated that one has to look at the market in certain relative terms.
He said that one had to think in a different manner when it came to bond markets. For instance, people used to consider bond markets to be a core part of their portfolios. And then, people started believing that bonds could outperform equities due to certain structural issues. However, investors could not afford to think the same way about bond markets today, Erian stated.
Currently, all bond markets are in an opportunistic mode. It is no longer safe to allocate a bulk of investment portfolio for bonds. For instance, Argentina at the moment is in a huge mess. However, the bond yields have risen up significantly.
Argentinian President Macri has been defeated in his primary elections, held in August. This has caused the nation’s asset markets to fall significantly, as more investors take flight. Populist Alberto Fernandez is in line to head the country next. This has led to Argentinian bond prices falling to extreme lows as the government imposed several capital controls. Investors are worried that Argentina would soon be defaulting on its debt.
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