Bonds Out, Stocks In

Published: December 13th 2010
in Economics » World

Paternoster Square, City of London, England



Since the 2008 crisis, bonds become a fantastic alternative for those who wanted to avoid a risky venture into the unstable world stock markets. The yield for company bonds during 2008 was irrational. Many reliable company bonds were traded at a yield of 20 per-cent and more. Such a yield reflects a complete loss of trust in the companies’ ability to pay their debts and interest to the bonds holders.


Bonds were considered worse than shares and investors were trying to save their money at any price. Those who saw the near future and analyzed the markets via companies' balance sheets made a fortune.


Low interest rates


In order to boost the markets, the Governors of Central Banks all over the world decreased interests to ridiculous rates. They said to the public the following: "No risks, no profits", this was a complete truth when you got "0" per cent for your deposits.


As a response, capital started moving into bonds that were considered more secure than stocks. The low supply and high demand brought a rapid surge in bonds prices until the effective yield in the public and private sectors was between 2 - 4 per cent per annum.


From bonds to shares


The liquidity in the markets was still high, but bonds were no longer attractive as they used to be a year ago. When searching for alternatives in the markets, investors began to develop a risky appetite and started shifting money from bonds to stocks, especially through trust funds.


Is 2008 already forgotten?


When the TSX Index is over 13,000 points and the Dow-Jones and the NASDAQ are over 11,000 and 2,500 points respectively, it seems that the chaos is forgotten and the investors are more optimistic than ever.


Is it so, or is it because investors had no other alternative?


Bonds start dropping


The yield for a 10 years US Bonds surged to 3.29 per cent during the last 7 business days. It means that bonds value dropped by 6 per cent approximately. Investors interpret the new yield as rising risks in the markets and may tend to shift their money to a less risky channel of investment.


If that tendency will accelerate, a "Snow Ball" effect may occur, and in this situation stocks may dive deep down and the yield on bonds will drop as well. The pattern will continue until equilibrium in the markets is achieved.


What to do?


The best thing to do is spread the investments to different channels and have a portfolio that has in it cash, short and long term deposits, bonds, stocks and commodities. In case of expected fluctuations in the capital markets, a defensive strategy is advised. Check with your financial consultants and brokers.


This article does not recommend investing in the capital market.

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