Jan 11 (Reuters) – The turmoil in financial markets triggered by central banks’ sudden abandonment of ultra-low interest rates has created a sacrifice that money managers will not be able to pass up. Her name is ANNA.
The acronym for “There Is No Alternative to Stocks” explains how loose monetary policy since 2009 has led to a boom in stock markets because returns on fixed-income assets such as government bonds became too low to interest investors. ANNA was the only profitable option.
But as high inflation forced the major central banks to raise the value of money, ANNA’s reign ended, and trillions of dollars of investment began to find a new home as investors adapted to the new, more diverse reality.
“Now there is EVA,” said PIMCO’s Andrew Balls. “There is an alternative option.” (The English abbreviation TINA – There Is a Reasonable Alternative – literally translates as “There is a reasonable alternative”).
Idanna Appio of First Eagle Investments says ANNA is good for passive investors, as it implies that stocks are rising because bond yields are declining.
In 2022, both stock exchanges and debt markets have been hit hard by high inflation and rising rates.
“This year will be turbulent,” Appio said, noting the volatile macroeconomic environment and the confusing situation with interest rates and inflation. “But, of course, massive passive positions in equities would not be a winning approach.”
The heyday of the ANNA strategy peaked during the COVID-19 pandemic in 2020, when global central banks bought up government bonds in an effort to stimulate the economy. By the end of 2020, this $18.4 trillion in low-risk debt had a negative yield, meaning anyone holding the bonds to maturity was losing money.
But now government borrowing yields have finally turned up, putting more pressure on equities while removing one of the main disadvantages of owning fixed income assets.
“Quantitative easing and zero interest rates are finally behind us,” said GAM’s David Dosett. “The risk-free rate (of government bonds) is now really profitable.”
Over the past year, the yield on 10-year US Treasury bonds has more than doubled to about 3.6%. The German bond yield is 2.28% compared to a negative value a year ago.
Bond funds posted net inflows for six straight weeks through early January, BofA said, based on analysis of EPFR data.
In the meantime, a recession can halt or cut dividend payments from companies, but those that have issued bonds and remain solvent must continue to pay bond coupons, regardless of their financial performance and directors’ decisions.
“You can find investment-grade bonds with attractive yields that mature in just 18 months, and there aren’t many unforeseen issues in 18 months,” said Premier Miton’s Neil Birrell. “At least you can make money just by tearing off coupons.”
The ICE and BofA index of US investment grade corporate bonds maturing between one and three years yields about 5.1%.
GAM’s Dowsett said his group’s portfolios of multi-asset funds have a higher proportion of investment-grade credit assets with shorter maturities than the market average.
HEADWINDS EVE may become more popular with investors, but she is unlikely to be a sweet and kind queen, especially with the return of the old enemy of debt markets – inflation.
Last year, inflation in the US and Europe jumped to 40-year highs, to which central banks responded with the sharpest rate hikes in decades.
Price pressures are easing now, and data on Thursday is expected to show annual US price growth of 6.5% in December, compared with 9.1% in June last year.
Bank of America forecasts 10-year Treasury yields to fall to 3.25% by the end of 2023 as debt prices rise, which in turn drives other fixed income assets stronger.
“The outlook for bonds is more positive, but it won’t happen right away,” said Bailey Wakefield of Aviva Investments, who is no longer shorting bonds, but not adding to their holdings either.
“Perhaps, until the peaks of interest rates and inflation are reached, we are still far from making a profit on such trading.”
The traditional rule that fixed-income investments are more profitable in times of economic downturns is complicated by the fact that persistent inflation and high borrowing costs are the most likely causes of a recession now.
American and European central banks are resolutely suppressing talk of an end to the fight against inflation.
“Farewell to ANNA is very important,” said Francesco Sandrini from Amundi. “But the idea that it’s bond time is a bit of an oversimplification.”
Nevertheless, ANNA still lost her power. Strategists at UBS believe the S&P 500 index will fall to 3,200 this year, about 17% below its current level, and other banks are echoing this dire forecast.
Finding reliable sources of income in the debt market may well be the most effective money-making tool for investors this year.
“You don’t need a bull market in bonds, now you have income,” said DoubleLine’s Jeffrey Sherman.
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(Naomi Rovnick, assisted by Yoruk Bahceli and Dara Ranasinghe, translated by Tomasz Kanik)