What knows he of equities, that only equities knows? That old observation by a poet about England in the early 19th century is based on the fact that all things are relative and need to be put into context. For many equity investors foreign government band markets may look to be on another continent but they are related to share prices.
I assume that most private investors in equities pay little attention to bond markets which are very different in concept and language. They are possibly also seen as irrelevant to people who are focussed on the latest bit of news about a particular share of a certain company. All that stuff about redemption yields, running yields and yield curves is a bit tough on the old brain cells, as Bertie Wooster would have said.
He would sensibly have left such analysis and investigation to the more cerebral Jeeves, whose natural mind and native intelligence had not been undermined by the upper class education of the time; the kind that had so badly prepared the members of the Drone’s Club for life; even those doing a bit of ‘professional’ work on the London Stock Exchange. All you needed for that, in those liberal and laissez faire days, was an understanding of how to read a good wine list to advantage; chums with inherited ‘dosh’ to invest (and to take to lunch) and other chums with what is now known as insider information – then a perfectly normal and wholly legal way of earning a living – as a basis for stock selection.
‘Listen Bertie old chap, this comes directly from a chum who knows the daughter – by the way do you know Mildred Blenkinthorpe – of the Chairman of the company, which is about to…’
Soon, Bertie would be long of share certificates – hoping to cover his earlier losses on the 2:30 at Taunton – sold by the solicitor trustees of some family trust fund, established by a hated Harley Street brain specialist, as an idea floated over a three hour lunch with another chum at the Savoy. You get the picture, I take it?
But despite the strain of it, bond data, like weather forecasts do give some indication of what economic weather to expect. Will it be sunshine or rain for equities? These thoughts were in my mind when my eye cursorily glanced over a small table of national, government bond yields. They tell a story a bit like a doctor’s stethoscope telling a doctor the rhythmic story of a Wooster jazz age heart condition.
I do not look at interest rates each and every day or week; I would love to have the discipline for that kind of near mechanical reliability – which I shall have when I am spliced with a computer.
There is a world of changing information out there and I tend to be led by the nose of article headlines. So I was a bit surprised to be reminded that German bond yields were still significantly below 1% at 0.7%. I know that Mario Draghi at the European Central Bank is still in QE mode (having joined that game very late in the day) but I was arrested in my musings. It tells you that the world’s obvious big problem is still deflation rather than inflation. How the policy makers in Europe and Japan would love to have a dose of that just now. Japanese 10 year government bonds still only yield 0.33%.
Although there is talk of interest rate rises in the US and possibly in the UK, we have to remind ourselves that 10 year government bond yields are already at 2.2% in the US and only 1.87% in the UK. That tells two slightly contradictory things: that markets have already made some move to discount future inflation and that yields are unlikely to jump sharply when it does materialise. Even in China, so I understand, reported inflation of 2% or so remains well below the authority’s long term target rate of a reported 3%. Although share valuations may be high, labour is too cheap; particularly for consumer economies like the US and UK.
In most places around the world we do not seem to be confronting serious wage led inflation prospects; the kind that has often in the past caused interest rates to be moved higher rapidly. The fact that rates have moved up to the current levels is bullish because it suggests economic demand has been raised from the dead, thanks to government’s having deficits to enable that to happen. Bond specialists, monetary economists and financial journalists take a refined and nervous position on this topic, because small margins of interest rate change make a big impact in their world.
It is not true to the same extent in the world of equities, even in relation to credit card funded consumer spending. I also note that companies, generally speaking, still have cash; have been topping up with cheap borrowings to fund mid term challenges and opportunities; and sport dividend yields higher than the yields on government bonds. I suspect that share prices will be higher by the next New Year.