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Buying bonds in an increasingly risky world

What trajectory will yields be on this year?
January 30, 2020

I’m not especially superstitious, nor strongly religious, but looking at the world this week I was reminded of the Plagues of Egypt, when the God of Israel inflicted a series of disasters to force the pharaoh to end the enslavement of the Israelites. Not only is China dealing with swine fever, now it’s coronavirus infecting people. East Africa is plagued by locusts, which in their millions blacken the sky. Antarctic ice sheets and the Thwaites Glacier – which is the size of Britain – are melting alarmingly quickly.  

The financial world is also struggling, a faction of finance borrowing billions from the New York Fed’s emergency window since mid-September. In fact, so many Treasury Bills have been repurchased that the Federal Reserve is considering extending acceptable maturities into short-dated Treasury Notes. This week the European Central Bank said six of the 109 banks surveyed fell short on mandated capital ratios and must shore up balance sheets, improve internal governance and review their business models. Stock markets suffered a sudden, small swoon. All in all, potential black swan rather than Black Death.

Jamie Dimon, head of the world’s biggest ever bank, is another worried man. At Davos, he told CNBC that "the only thing I have trepidation about is negative interest rates, quantitative easing and the diversion between stock prices and bond prices. It’s one of the great experiments of all time, and we still don’t know what the ultimate outcome is." This is the bank that shifted $130bn of excess cash into bonds in November. It is not alone. In the US, last year fund flows into taxable bond funds and exchange traded funds (ETFs) was roughly $262bn while equity funds attracted $150bn or so. In the UK, a record amount was allocated to bond funds.

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