Conventional wisdom among Wall Street experts stated that the two asset classes to avoid were those that were interest sensitive as bonds and commodities, primarily gold.
For the past eight months we have been told that the U.S. Federal Reserve will raise interest rates. That would have been the first increase since last December. Everything seemed to point to an imminent rise, but repeatedly we are told “not yet.”
Consequently, we are informed that as a result the bond market was a poor place for investment. Yet, it has turned out to the contrary. The bond market has performed very well. With the current negative interest rates now prevailing, the prospects of going forward for strength in the fixed interest market are very bullish.
The British bond market’s outlook was poor, but the Brexit vote to leave the Euro led to a strong bond market and a comparatively weak stock market. Still, given all the bad news that abounds, investors still clung to the perceived safety of bonds. In Europe the result is an almost unprecedented period of negative interest rates.
This was supposed to be the year for the transition from the bond market to the stock market, away from the safety of bonds. The rising budget deficits in North America should have been the catalyst for more inflation that would be bad for bonds.
In Canada the platform of the victorious Liberals proposed increased spending on infrastructure projects and a greatly rising budget deficit, but so far the spending plans have not been forthcoming.
Growth rates in North America are down substantially from last year. Too, oil prices have remained somewhat subdued, initially because of shale oil output, but the sluggish growth in North America has put a lid on inflationary expectations.
Also, the Chinese economy is experiencing a marked reduction in growth rates. As well the Japanese economy remains mired in a quasi-recession. Even though Japan’s overall bond market is at extremely high levels, investors remain oblivious to that, at least for the time being.
Here the housing industry’s surge is ongoing and that should support a demand for mortgages. Investors seem to realize that this industry cannot continue at present unsustainable rates, but the negative factors have not quashed the bond market.
Pension funds need interest rates to fund long-term liabilities, so they have turned to lower grade investments – a worrisome trend. Eventually, the cutbacks in the oil industry will cease and prices will rise.
For the time being however, all negative factors that should impinge on the bond market are dormant, and investors seem perfectly willing to invest in bonds, and of course in gold, notwithstanding the admonitions of Wall Street to avoid these commitments.