© . FILE PHOTO: People are seen on Wall St. outside the New York Stock Exchange (NYSE) in New York City, US, March 19, 2021. REUTERS/Brendan McDermid/File Photo by Mike Dolan LONDON () -Inflation rages, interest rates soar and bonds look like treacherous investment waters — making any arguments for a pullback into the fixed-income vortex intriguing anyway. To be sure, it’s been a rough year so far for most asset classes, except for oil and commodities. But the most interest-rate sensitive securities, or long “duration” games, have been below the cosh. Treasuries have lost 5-6%, while US technology stocks are down more than 10% – and fund managers are heavily underweight both, with an overweight preference for global equities and cash. Mutual fund data shows two consecutive months of outflows from global bond funds — a $32 billion cumulative exit for the year so far. Rising oil prices, tensions over war in Eastern Europe and central banks charting a return to pre-pandemic monetary institutions are all stirring the waters for investors fearing another end to the 40-year bond market. But the long-term strategists at JPMorgan (NYSE:) are taking a different path, screening all the turbulent news, macro forecasting and tactical trading views to model how mixed portfolios would perform on a 10-year view based on past performance. Jan Loeys and team this week updated their outlook on 10-year future returns for a typical 60/40 stock/bond portfolio, saying the recent asset price shakeout significantly boosted their projected returns from a year ago. The JPM team maintained that historically the best guide to bond returns over the next decade was the prevailing yield. The jump of more than a percentage point over the past year in yields on US bond indices – which includes government and government bonds, as well as investment grade and high-yield corporate bonds – now brings current yields to about 2.7%. Crucially, this makes them positive again in real or inflation-adjusted terms when using 10-year market inflation expectations of 2.4% as a guideline. Coupled with a drop in US equity multiples improving their annual return outlook over the next decade to 4.8%, JPM estimates a 60/40 blended portfolio’s outlook was now 4% per annum. That’s one percentage point higher than last year and 1.6% positive in real terms — even though it’s still historically unattractive and well below the 5% real average for the past century. But their conclusion was that this improvement in mixed returns could be enough to dissuade investors from the TINA phenomenon (there is no alternative) that has at least partly caused the stock price boom as bond yields have increased in recent years. have reached a bottom. “The urge to consider equities to bring portfolio returns closer to requirements has abated,” they told clients. “On the fringe (it’s) a reason to start rebalancing to bonds, without being in a rush.” BORDER CONDITIONS? While that’s hardly a consensus, the view aligns with some fundamental arguments – such as central banks acting fast now; peaking inflation rates and improved real returns; cooling growth and flattening yield curves; and the idea that any positive real returns in “safe assets” are attractive to risk-averse funds right now. For example, dynamism in the defined benefit pension fund sector was widely cited last year as a major factor that steamed the yield curve and weighed on long-term returns as excessive equity gains accelerated full funding status and massive “risk reduction” of portfolios. For more tactically active managers, there are also signs that this latest volatile period may have exaggerated the gloom of bonds.PIMCO chief investment officer Dan Ivascyn said this week that his portfolios remained underweight bond durations, but valuations are now “I don’t think we’re too far from levels where we’re going to start reducing that underweight.” Even chartists charting 10-year Treasury yields think it would be premature to say the least. the end of the 40-year bond market The main criticism of the JPM’s long-term view is, of course, that it’s based on past performance as a guideline – reasonable, unless you think we’re heading for a paradigm shift in the global economy where bond yields and credit spreads have nowhere to go but up. Euan Munro, Chief Executive of Newton Investment Management, wrote this month that markets had reached such “borderline” conditions and that this should force a rethink of 60/40 portfolios towards a more diverse and actively managed fixed income segment. Its main bone of contention with historical price performance modeling was that it actually assumed a questionable picture that the future replicated the recent past. “Those who adopt such an approach make — or at the very least imply — a fairly detailed prediction of future market conditions, whether they realize it or not.” Bet now on 2032. The author is editor-in-chief for finance and markets at News. All opinions expressed here are his own (by Mike Dolan, Twitter (NYSE:): @reutersMikeD; edit by David Evans)
