Investment

Chart of the Month – The return of higher yields marks the end of an era

by Angel Sanz

The return of higher yields marks the end of an era

The film “The return of the Jedi marks the end of an era” suggests the conclusion of a significant period of time. Similarly, the current bond market marks the end of an era in which central banks pushed interest rates to 0% and expanded their balanced sheets through the implementation of Quantitative Easing (QE). Just as in the famous George Lucas’ trilogy, there are two key events in the bond market that preceded this new era: The Great Financial Recession in 2008-09 and the Covid19 pandemic, both of which led to extremely lax monetary policies.
Now, inflation has returned to our daily lives and central banks are normalising monetary policy. As a result, bond yields across all the spectrum have increased significantly to levels that are attractive again. Unfortunately, the bond index displayed in the chart lost 15% during 2022.
The chart shows the Yield To Worst (YTW) of the Bloomberg Global Aggregate Baa Index Hedged to USD. We can identify two main points:

  • During the period from 2013 to 2021, when central banks significantly relaxed monetary policy, these bonds yielded an average of 2.6% in USD. When hedged to EUR, this yield was lower than 1% and when hedged to CHF, it was close to 0%. During this “era” it was difficult to achieve decent returns in the conservative portfolio of fixed-income securities, especially in EUR or CHF.
  • As of today, in this “new era”, we can invest in liquid Baa securities that yield 5.3% in USD (when hedged to EUR, around 4.1%; when hedged to CHF around 3.1%). This makes this asset class attractive again, as it was in 2010-11-12.

A savvy investor might point out that with US headline inflation at 7.1%, bond investors are certain to lose purchasing power before taxes, and lose even more after taxes. However, a further analysis of inflation shows that break-even inflation predictions for the next 7-10 years suggest price increases of around 2.2%. This means that we would gain 3.1% in real returns investing in relatively secure Baa bonds (BBB using S&P ratings) with average maturities of 8.9 years and a duration of 6.2 years.
SO, WHAT CAN WE EXPECT IN THIS “NEW ERA” FOR BOND INVESTORS IN 2023?

  • Case 1: Bond yields remain stable at these levels: Expected return 5.3%.
  • Case 2: Inflation is worse than expected and central banks tighten more than expected, causing the YTW to increase from 5.3% to 6.3%. Expected return -0.9%.
  • Case 3: Inflation follows the expected path and cental banks become less hawkish or dovish, causing the YTW to decrease from 5.3% to 4.8%. Expected return: 8.4%

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.  Additional information is available on request.
© NS Partners Group

Return to listing
back to
the top
Antonio Mira
CHIEF FINANCIAL OFFICER, MEMBER OF THE EXECUTIVE COMMITTEE

Antonio Mira joined NS Partners in 2006 as Group Chief Financial Officer. He heads the corporate functions and is involved in coordinating and implementing the decisions of the Executive Committee.
An experienced bank auditor, Antonio started his career in 1995 with Arthur Andersen, where he worked for some 7 years before joining Ernst & Young in 2002 as a Senior Manager.
Antonio is a Swiss chartered accountant and a Business graduate of Lausanne University (HEC).

Sébastien Poiret
DEPUTY HEAD OF WEALTH MANAGEMENT

Sébastien Poiret joined NS Partners in 2008 and manages funds of hedge funds and private client mandates. He also oversees the development of the Group’s offices in Mauritius.

Prior to joining NS Partners, he served as a Trader, Head of Manager research and Portfolio Manager in the USA and Switzerland for a single hedge fund (1998-2004) and for Optimal (2004-2008), Grupo Santander’s fund-of-hedge funds operations.

Sébastien holds a Bachelor’s degree in Corporate Finance from the ESPEME Business School (EDHEC Group) and an MBA in Finance and Economics from the Institute of Business Administration, both in Nice.

Abir Oreibi
BOARD DIRECTOR

Abir Oreibi joined the Board of the NS Partners Group in 2018, where she brings her truly international perspective and rich experience.
Among many other ventures, Abir set up Alibaba.com’s first European office. After living and working in Shanghai, Hong Kong, Bangkok and London, she now lives in Geneva, where she is CEO of Lift Events, an organization that identifies technology trends, their business and social impact through the organization of events and open innovation programs. Issues related to the challenges and opportunities created by new technologies as well as the strategic responses from organizations are at the heart of Lift’s activities.
Abir holds a BA in Political Sciences from the University of Geneva. She is an investor, and member of advisory and innovation boards.

Romain Pidoux, CAIA

Add Your Heading Text Here

Romain Pidoux joined NS Partners in 2011 and heads the Group’s Risk Management.
He started his financial career in 2005 as Head of Quantitative Analysis for a Swiss Family Office, selecting funds and managing portfolio allocation. In 2008, he switched to the alternative world and joined Peak Partners as hedge funds analyst.
He is a Chartered Alternative Investment Analyst (CAIA) and holds a Master’s degree in international relations from the Graduate Institute of International Studies at Geneva University.

Your browser is not supported. Please use another browser.