Nick Gartside, International CIO for Fixed Income at JP Morgan Asset Management, says that despite discussion on a possible 'great rotation' into equities from bonds the real challenge to fixed income is how much liquidity is available to support the market.
Nick Gartside, International CIO for Fixed Income at JP Morgan Asset Management, says that despite discussion on a possible ‘great rotation’ into equities from bonds the real challenge to fixed income is how much liquidity is available to support the market.
The start of the great rotation.
The death of bonds.
Well, it does appear that memories are a little challenged. Should markets be surprised by the price action over the last month? Although core bonds did sell off in January (10yr US Treasury yields increased by 23bp) and equities appreciated, these moves are well within recent historical experience. Looking back over the last ten years, in six of those years Treasury yields have increased over the first quarter and equity markets were up in seven.
Additionally, it is worth remembering that bond markets have typically traded in broad ranges. In 2012, the range on the 10 year US Treasury yield was 100bp, which may seem large but is in fact narrow compared to the prior four years when the trading ranges have been around 200bp (2011: 233bp, 2010: 187bp, 2009: 195bp and 2008: 224bp). 2013 is likely to be no different. Economic data releases will wax and wane, political risk will flare up and there will be further crises in the eurozone and elsewhere as countries continue to grapple with the pressures of deleveraging. In reality this volatility will present opportunity and the ability to add return.
And the ‘great rotation’? Well….hmm…perhaps in reality more of a ‘great flood’. Although year to date flow data does show powerful flows into equities, cash also continues to move into bond funds in meaningful amounts, albeit the higher risk and more flexible parts of the market such as high yield, emerging market debt and total return strategies. Even flows into money market funds were marginally positive in January.
Ultimately the sheer amount of liquidity is supportive of bonds (and other asset prices) and it is the removal of this liquidity will represent the real challenge. With a sub trend economic recovery, with unemployment in the US stuck at 7.9% and much of the rest of the developed world with around zero growth, it seems too early to talk of tighter monetary policy. Perhaps the surprise this year will be the returns that certain segments of the bond market, such as high yield and emerging market debt, can still deliver?