“Bond valuations? It’s not a pretty picture,” admits Gary Kirk, fixed income fund manager at TwentyFour Asset Management.
But Kirk believes that despite prices that look – at their best – uncompelling, the multi-decade bond rally has further to run.
There are currently about 25,000 bonds on the global market, issued by both governments and corporations. According to Kirk’s data, the average yield of these bonds is a paltry 1.9%. Back in 2000, the average bond yielded significantly higher at 6%.
Average current duration is seven years, quite risky considering the low yield. If rates rose at all over that time, which is highly likely – both the Federal Reserve and the European Central Bank are indicating so – you would lose money.
Are We on the Cusp of a Crash?
Yet, despite these record low yields, and the length of time bond prices have been rising for, Kirk says investors will have to wait some time before we see a correction. The key tell-tale signs that indicate the end of a bull market are absent; companies are not over-leveraged, that is, they are not overly-indebted, there is not a glut of junk bonds being issued, companies are not seeing their credit rating downgraded, and the financial sector is in great shape.
“The build-up of leverage caused the credit crisis in 2008, but now? It looks pretty good,” says Kirk. “It is building up, but it is not at an alarming level. You get a good picture looking at bank data and company results. Bank balance sheets look more robust than at any time in my career.”
The only area of concern Kirk has is within the UK consumer sector – the Bank of England’s Credit Conditions report revealed there have been a growing number of consumers defaulting on unsecured loans. But this one red flag is not enough to convince him we are about to see a crash landing – either a recession, or a sudden about-turn in bond markets.
“This cycle should end in a benign fashion,” says Kirk. “That is normal. An economy does not have to blow up – only five peaks have ended in a hard landing. The current cycle will continue as is for a while. The market remains expensive for much longer than they remain cheap. When markets become cheap money rushes in and closes the arbitrage.”