Busting the bond myths

By Ryan Smith on July 19, 2018

Investment markets in 2018 are volatile.

There is no doubt that the markets seem a lot more volatile than they have in recent years. With so much political upheaval all around the world, this may come as little surprise, but for those holding investments, it is important to know which news is worth getting worried about.

Several preconceptions around bonds have built up over the last few years, with settled markets in some areas allowing for easier inroads than in others. However, when everything seems up in the air, change is always more likely.

Avoid relying on inflation

Respected sources such as the Financial Times claim that the US is likely to start investing more in its businesses, which in turn will lead to higher productivity, and later, wage growth. This wave has yet to hit Europe, with no slated inflation changes until 2019 – but there is no guarantee that the negative yields from bond investments will continue to hold with the impending exit of the UK from the EU. While financial investment advice may be to wait before reacting, this may not ring true forever.

The source also suggests a looming credit bubble, but leverage is currently keeping low while interest coverage is rising.

Not all emerging markets are the same

Another myth worth delving into is the idea that each emerging market carries the same weight and stress points. Both yields and returns are giving wildly different responses across these markets.

Something that previously looked like a sure investment may start to falter all because there was not enough diversification. This could have a serious knock-on effect on your overall strategy, meaning that you feel like you have to make more gains elsewhere – which can end up being a costly risk.

Politics are set to have a big effect on the market this year, and a smart strategy could centre around seeing which countries are making the most growth, have the most compressed markets, and seem more stable, financially or politically.

The current consensus appears to be that a much more selective strategy is needed to carry on seeing capital gains, and any return at all. With so much out in the open at present, it would seem that nobody is 100% sure on which side the dice will end up on, so putting all of your eggs in just a couple of baskets means that you are really reliant on one market pulling through.

Certain beliefs around bonds may have held true for a while, but there is no guarantee that they will continue to do so.

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