August is a useful month in many ways.
It is a time when a lot of us take it easy, sit on the beach and forget about the daily humdrum of
business life. For those who stay behind, the days are a little slower, which makes getting to work
quicker because of the lack of commuters somewhat redundant! However, the slow down in pace
does provide an opportunity to think about things.
For me, this August has been spent thinking about the economic way ahead and the state of the
markets. In particular, I have developed something of a complex fascination around the current
returns available from fixed income securities and in particular the shape of the treasury yield curve
in the US, UK and Japan.
The yield on the 10‐year US Treasury bond tumbled to 2.54% last week, down from 2.99% three
weeks ago. Ten‐year bonds are now yielding 0.93% in Japan, 2.27% in Germany and 2.97% in the U.K.
Similarly, we can borrow money in the UK swaps market against real estate assets at little over 2% for
5 years and 3.75% for 30 years., where gross assets can be acquired at 7%‐8%.
For sure, there has been something of a bull run/bubble in bond prices for the best part of 5 years, in
particular over the last 18 months. One cannot help but visualise the shoe‐shine boy outside the NYSE
in 1929 talking about how good stocks can be as an investment when one reads about bankers sizing
up investors for 100 year bonds.
I am therefore fairly sure that I will never be able to borrow money so cheap for the rest of my life as I
can now. However, this leads to an inevitability with important implications for asset allocation and
Critically, the inevitability is that bond prices cannot continue to rise much further, especially from
their current levels, and that at some point in the next 3 to 6 months, investors will begin to demand
a higher return from these fixed income securities. Not least to compensate for the associated risks of
inflation, default and further macro‐shocks. Given the in‐price of many investors, this will easily lead
to something of a potential bloodbath.
With this in mind, how best to invest in what is still an uncertain economic environment where fixed
income security is prices at such unrewarding levels?
Equities remain volatile with corporate earnings growth mixed with a consensus around a softer
Commodities have had a bit of a bull run with dollar weakness driving classical alternatives such as
Naturally, I am aware of the benefits of commercial real estate investing and the fixed income profile
this can deliver of 8‐12% annual coupon against A+ rated covenants, but of course I am biased and so
I will not shamefully promote this
So, with so few adequate answers that are easily summarised and to ensure that this does not
become a Phd paper, I suppose this somewhat converts easily into a rhetorical question for which I
am of course open to answers.
I will however finish with another question which is as cheesy as it is poignant, made famous by CNBC
anchors, ‘do you know where your money is?