Where to invest during the bond market tantrum?

6 min Read Published: 10 Jun 2015

The bond market has thrown a tantrum so where do I invest now?

ID-1009179The 27th April 2015 could become a significant date in the history of investing. It was around that date that the bond market started throwing a tantrum and we subsequently experienced a significant sell-off, the like of which hasn’t been seen since 1994. This in turn saw equity markets tumble and investors’ portfolios fall in value.

Yet the bond market has continued to tantrum and bond and equity markets have taken a hammering. The German stock market, for example, is officially in correction territory as it's now down by more than 10% from its recent highs. Below I explain what has happened, where you should be investing and the funds to buy. But first you need to understand how the bond market works.

How does the bond market work?

  • A bond is essentially a loan to a company made by an investor
  • An investor receives an interest rate payment, known as a coupon, plus the return of capital at the end of the loan term
  • Bonds are traded in a similar way to stocks and shares and the price a particular bond trades at will depend on how risky the investment looks at the time the trade takes place and can be higher or lower than the original price
  • Bond yields are quoted as the interest rate received on a bond as a percentage of the purchase price, as yields go up the traded price of the bond falls and vice versa
  • Bond fund managers are trading bonds on a daily basis with lots of different funds and companies, a bond fund is just a selection of bonds which help spread the risk
  • As interest rates on a bond are fixed at outset then as interest rates and inflation rise bonds become less attractive

So what has happened with the recent bond market sell off?

  • The bond market has enjoyed a 30 year bull run where prices soared, meaning yields fell
  • Recently central banks like the European Central Bank (ECB) have been buying lots of bonds through their Quantitative Easing programme  (QE or money printing) which drove the bond market up
  • Buying of bonds by the ECB was designed to reduce the risk of deflation by creating more money in the economy
  • At the end of April 2015 there was a wild swing in the market consensus and everyone thought that inflation was now more likely than deflation
  • This change in sentiment resulted in a sell off in the bond market, and a fall in prices, as everyone ran for the exit
  • Fortunately 80-20 Investor subscribers were ahead of the game as I warned them of the impending bond market crash in my weekly newsletter, days before it happened. You can read it here.

Are there any funds that can withstand another bond market tantrum?

Interestingly this isn't the first market sell-off sparked by a bond market tantrum. The original 'bond taper tantrum' occurred in May 2013 when the US Federal Reserve hinted that it was thinking about slowing its money printing exercise. In reality that meant it would slow down the rate at which it was buying Government debt. The imminent departure of such a big buyer in the bond market caused everyone to rush for the exit at once.

  • So I recently carried out a piece of research to find if any bond funds had withstood the two recent bond market sell offs
  • I started by analysing over 3,000 funds to find out those that showed a positive return during both recent bond market sell offs

The full research was exclusively available to 80-20 investor subscribers. You can sign up to 80-20 investor to find out more.

80-20 Investor research appearing in The Telegraph

However, I made part of the research available to The Telegraph. You can read their article in full - The funds that survived the last two bond market routs.

Yet a week, before 80-20 subscribers received a carefully selected subset of the best funds from those listed in The Telegraph piece . Since that date markets continued to fall with the FTSE 100 now down - 2.5% in just the two weeks since I issued the research. Unsurprisingly most investment managers are down.

However if 80-20 Investors had bought the funds I suggested on average they would have been up +0.63% in the same two week period when markets were falling.

To put that into context they would have outperformed 93% of the 2,307 professional fund managers!

If you'd like to find out more about the other benefits 80-20 Investor subscribers enjoy then click here.


Image: Michelle Meiklejohn