The masters of money have largely shrugged off the imponderabilities of war and commodity price shocks, and this has led to quite historic shifts in market structure. The value of negative-yielding bonds in the global market has fallen by a staggering 80% in the past three months (see ‘number of the week’). To those worrying about expropriation by negative nominal rates in the long run: hear, hear, the end is nigh! It may not be the end of the world, but rather the end of financial repression. The regime of taxing bondholders via negative rates has inflicted a lot of pain. You could argue, of course, that real rates are still in deeply negative territory. But even here the rise in nominal rates, together with easing inflation rates, may signal that the tide is turning.

Conclusion for investors

There have been numerous false starts in rate reversals in the past, with the hopes of higher rates repeatedly dashed by deflationary shocks. We therefore suggest treading carefully when trying to adapt to what appears to be a new rate regime. In fixed income, it may be wise to add to strategies that capitalise on floating rates, as they will compensate for some of the downside in bond prices through higher payouts going forward. That said, it may also be wise to sell some of the upside in yields, as bond markets may get ahead of themselves with the upside of the coming months. Prudence is also warranted in the case of equity investors, who should assess the economic damage wrought by the combination of commodity price shocks and interest-rate normalisation by central banks. This means curbing cyclical exposure for a while and adding exposure to defensives. This can be done regionally by adding to less cyclical markets, like the Swiss equity market, or it can be done in terms of style investing, by adding to high and stable dividend-yield strategies.

Number of the week