For those thinking that this note is about the long-awaited Warner Brothers film on all things Barbie, you may be sorely disappointed, as in this case Barbie stands for “Bonds Are Really Back In Earnest”.
I would love to be able to take credit for the acronym, but it is from a podcast I listened to at the weekend from the Financial Times called “Unhedged” (I would recommend a subscribe if you are partial to a podcast).
The podcast looks at last week’s US inflation numbers and how the print came in at 3% (published by the Bureau of Labor Statistics), which raises the question of what happens if we got inflation wrong and it comes back down towards the long term 2% target of the Federal Reserve (Fed)? Whilst you can argue about core inflation being higher, it is heading in the right direction and that is important.
The crux of the podcast is that inflation has come back down, the central banks haven’t killed the economy and equity markets have been strong, which is, in theory, the best outcome we could have hoped for. However, most people do not seem happy. In fact, this year’s equity rally has been one of the most hated.
The Fed may have got lucky and managed to engineer the soft-landing investment markets have been talking about of late (where they manage to bring inflation down, by rising interest rates without causing a bad recession) and, at the top-level, growth seems to be steady, jobs are still being created, the consumer is still spending and, by all accounts, at this point in time, bad debts are not piling up in the banks.
But did the Fed win by mistake? As our CIO, Kevin Boscher, discusses in his latest macro update, we have experienced a pandemic followed by a war, something that has never happened before, and prices jumped up on the back of the supply chain issues companies were faced with. If all the inflation was supply-side (as in we couldn’t get hold of the stuff to make things), there is an argument that the interest rate hikes did not actually bring the inflation numbers down, and rather that it was all about the passage of time.
From an equity point of view, some big investment houses are saying this is too good to be true, that markets are priced for perfection, and there will be some form of pull back. What was telling was that neither the bond nor equity markets rallied hard on the back of the inflation print, as markets are not too sure what is happening.
But for the first time in years, we are finally getting paid to wait, as you can now get a real return on government bonds – think treasuries, European Investment Bank (EIB) bonds or the short gilt for example. Prior to the Fed rising rates, we were subject to TINA (There Is No Alternative) as bonds yields were so poor you had no alternative than to put your money into stocks and other “risky” investments.
Now we are in a BARBIE world, our Ravenscroft Global Income Fund* has recently bought the 2025 EIB bond, yielding over 5%. The same with the ultrashort held across our Income, Balanced and Growth strategies*; here you get a yield to maturity of 5.6% with a weighted maturity of 12 months. Whilst this may move around a little, the short maturity of these instruments makes the investment opportunity attractive.
Maybe things are positive, and “Barbie” world is alive and well…
*These funds form part of Ravenscroft’s offshore range and are only available to Channel Island and Isle of Man investors.
