‘Tumultuous’ bond markets sending atypical signals
Historical bond rate cycle patterns have been broken, casting doubt over expectations of a “vanilla market correction”, according to the CIO of a boutique fund manager.
Subdued market conditions continued amid global economic uncertainty, sparked by monetary policy tightening from central banks in response to high levels of inflation.
However, despite resembling previous economic patterns, some observers expect this latest cycle to trigger atypical activity.
According to Garth Rossler, chief investment officer at Maple-Brown Abbott, it would be a mistake to interpret the past six months of market weakness as a “vanilla market correction”.
Rossler pointed to “tumultuous changes “in global bond markets, which have “broken” long-term downtrends.
“In Australia, the pattern of lower bond rate cycle lows and lower cycle highs has been decisivelybroken and yields on 10-year bonds have risen to levels seen a decade ago,” he said.
“In the US, returns on 10-year bonds for the year to date are the poorest in six decades.
“After these bond rate increases, investors are beginning to think bonds might potentially be an attractive investment.”
Rossler said he expected these trends to have a significant impact on the stockmarket,
“Higher bond rates have already had a negative impact on the level of the market as they have on cross-sector returns,” he added.
“Stocks that have benefited greatly from exceptionally low interest rates (growth and tech in particular) have generally had a setback while commodity producers and other value sectors, such as some of the financials, have seen a turnaround.”
But while significant, this trend has been uneven, leaving investors unconvinced that historically-rewarding sectors would not continue to outperform.
Ultimately, Rossler said, the size of movements in long bond rates globally suggested further stock market weakness was likely.
However, value stocks were expected to better absorb the impact.
“Value stocks have performed relatively well in this environment, and we believe there is room for further outperformance given valuations remain supportive relative to growth stocks,” Rossler added.
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