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What we’re thinking about markets right now
You may have seen headlines about the bond market being “on fire.” It’s worth taking a moment on that, because the reality is a good deal calmer than the language.
Yields have risen a little. That’s real. But a small rise in yields is not a fire, whatever the front pages say.
What’s actually going on
A few things at once. Japan’s interest rates have been held very low for a long time, and the strain of that is starting to push up the yields on Japanese government bonds, which tugs at government bonds everywhere. There’s a broader unease about how much debt the big economies are carrying. And most immediately, the oil price has spiked again on the back of conflict in the Persian Gulf, which feeds straight through to yields.
None of that is an emergency. There’s still plenty of demand for these bonds. It’s just meeting that demand at a slightly higher yield than we’ve all got used to over the last decade.
The part worth understanding
Here’s the bit we find genuinely interesting, and it’s a little counterintuitive.
Governments and central banks don’t want yields to rise too far, because they have a lot of debt to fund. So they intervene to hold yields down. And if you hold yields down artificially while the economy is still growing in cash terms, you’ve created a kind of pressure that has to go somewhere.
It can’t show up in bonds, because that’s the very thing being held down. So it tends to show up elsewhere, in the prices of other assets, shares among them. Which is why a rising-yield story that sounds bad for markets isn’t necessarily bad for the things you own at all.
The thing worth keeping an eye on isn’t the debt itself. Governments have shown they’ll step in to manage that. It’s the side effects of all that stepping in.
The recession number
We’ve written before about our rough estimate of the chance of a US recession in the year ahead. In June it was around 29%. It’s been easing since, and it has now dropped below the level we treat as worth worrying about at all.
The US economy, underneath the noise, is strong. The jobs market is strong. That matters more than any headline.
What this means for you
No changes this month, and no rebalance.
In fact, on the numbers, we could reasonably justify taking a little more risk than we currently are. We’ve chosen not to. The backdrop supports it, but “we could” and “we should” are different questions, and we’d rather be paid properly for the risk before we take more of it.
We have two meetings coming up in September where we’ll look properly at the shape of the portfolios, review the targets, and carry out our routine annual rebalance. Nothing in the current picture needs a hurried decision before then.
A quiet month, in other words. The kind we’re happy to have.
Next Investment Committee Meeting
Our next full meeting is on 18 September, following a short catch-up on 4 September