Global investors have their pick of reasons to avoid the bond market. Inflation is at levels not seen for decades, growth is soaring, and central banks are backing away from bond purchases while some are already raising rates. Hence, the consensus is forecasting higher rates ahead and crying “abandon bonds!”
Like each crisis of the past 40 years, the current cycle has its idiosyncrasies. But in the end, each economic recovery has one thing in common: a buying opportunity in bonds (Figure 1). The surge in growth pushes yields higher, only to be followed by a seemingly overwhelming downforce from the secular fundamentals of aging demographics and high debt burdens. Granted, returns from the current low level of yields will be more modest than in the past. But in terms of timing, many of the world’s bond markets look like they hit their peak in yields at the end of the first quarter of 2021, suggesting the bull market in bonds may already be underway as we start 2022.
This paper opens with a comparison of the current bout of inflation to that of the 1970s. Despite myriad differences, the net result may be more similar than different: policy makers set their sights on depressing inflation, which ends up turning the tide in the bond market for the better. We subsequently outline a few supporting points for our bullish thesis before looking at the possible risk scenarios and the investment implications