This Stunning Anecdote Shows Just How New The Concept Of A Bond Market Sell-Off Is To Everyone

August 18, 2013 Leave a comment

This Stunning Anecdote Shows Just How New The Concept Of A Bond Market Sell-Off Is To Everyone

MATTHEW BOESLER AUG. 16, 2013, 12:40 PM 3,255 4

10-year-ust-yield

Business Insider/Matthew Boesler, data from Bloomberg

For the vast majority of the current crop of Wall Street traders, a bull market in bonds is really all there’s ever been. One has to go back more than 30 years – to the late 1970s and early 1980s – to find the last bear market in bonds. Yet things have changed in 2013. The consensus on Wall Street now expects the Federal Reserve to announce a tapering of the pace of monthly bond purchases it makes under its quantitative easing program at the September FOMC meeting. The mere thought of such a decision in the minds of traders and investors was enough to spark a violent sell-off in the Treasury market this summer – the yield on the 10-year note is up 118 basis points since May 2 alone at current levels near 2.8%. Now, the long bull market in bonds is widely perceived to have come to an end. “A remarkably low 3% of investors expect long-term bond yields to be lower in 12 months,” said BofA Merrill Lynch chief investment strategist Michael Hartnett of the bank’s August Global Fund Manager Survey. As Treasuries have declined in value this year, many bond investors have seen something they aren’t used to seeing: negative returns in their monthly statements. In fact, according to ConvergEx Group chief market strategist Nick Colas, there may be a lot of people out there who didn’t even know that was possible. “I have had more than one high-net-worth broker tell me that his clients think the ‘Risk Free Rate’ means that you never see a mark down in the value of your Treasury portfolio,” says Colas. “They are only now discovering their error, and the realization is unwelcome.” The “risk-free rate” is a theoretical concept used in ubiquitous financial calculations like the capital asset pricing model to value securities. The “risk-free rate” in these models usually refers to the yield on U.S. Treasuries, where the rate of return (yield) is viewed as “riskless” because Treasuries don’t contain default risk. So, apparently there are investors out there who heard the term “risk-free rate” and assumed that an investment in Treasuries would never lose money. “Fixed income isn’t a one-way bet,” says Colas. “That fact spills over into everything from corporate capital allocation to equity market valuations. And it will take longer than to Labor Day to accommodate this new fact.”

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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