On reading it, it made think of the Great Rotation and the misguided belief that the 30-year bull market in bonds was about to come to an abrupt end. This was never going to be the case. More people are starting to realise that now. However, as we entered 2014 it was a very real concern – supported largely by the assumption that the US and the UK were about to embark upon a rate-rising path.

Although apparently imminent, it hasn’t happened yet – on either side of the Atlantic. And expectations keep get pushed back. The strength of the US dollar has complicated things. In world starved of income, any kind of yield is sought after – but one backed by the strength and credibility of US Treasury is particularly attractive. The European Central Bank’s actions have exacerbated the situation.

Inherent demand

The Great Rotation argument was flawed for the simple reason that it ignored the weight of structural, inherent demand that bonds have. People need income. And bonds will continue to play the starring role in providing it – unlike equities, the income level from bonds is ‘fixed’ at the outset. At the institutional level this simple fact also offers huge appeal, and therefore demand. Matching liabilities, to which there are still vast quantities of sloshing about, is big business. There are two sides to every market and even a modest rise in yields is likely to trigger a plethora of eager buyers in to action.

The Mario factor: yielding the positive from the negative

Yields are now negative in many parts of Europe. This applies not only to government bonds but now to some corporate bonds as well. The zero-bound has therefore been broken, proving that it is just that – a mere boundary as opposed to an impenetrable threshold.

It takes a certain kind of optimist to find a positive in all this – but many clearly are able to, as a steady stream of buyers continues to suffocate yields.

The positive that they see is a guarantee. But, to all intense and purposes, it is a strange one. It may be a guarantee, but it is a guarantee of loss. That is what negative yields essentially mean in practice.

There is another potential positive for investors. This is the notion that just because yields have gone negative, that doesn’t mean they can’t fall further: banks, insurance companies and pension funds all have to adhere to rules that force them to buy assets of a certain quality. This pushes them towards bonds, regardless of how expensive they may appear. And then you have traders and speculators looking to exploit short-term opportunities that these dynamics throw up, which can add to the downward pressure if that is where the ‘majority’ see the wind blowing.

Stay nimble

In such an uncertain environment, it makes sense to adopt a flexible and dynamic approach. Being nimble and therefore able to quickly shift portfolio positioning is going to be crucial in the months and years ahead. Removing home-bias tendencies is imperative too. The ability to alter geography and credit quality can, if implemented effectively, offset the effects of rising rates domestically. 

And so while Shakespeare’s sonnet may miss the mark with bond investors at present, to be fair to him he didn’t have us in mind when he wrote his haunting words. We could, however, still learn something the great bard. His ability to break away from literary traditions and go against the grain should inspire us to have convictions in our views and take positions that may contradict conventional wisdom.

We need to recognise that what worked in the past will not necessarily work in the future.

Brad Crombie, Global Head of Fixed Income

Aberdeen Asset Management