Are boring old bonds the new meme stock?
Not at all, but recent market conditions have created a window of opportunity in the debt markets, leading to a surge in interest among the retail investment class, not to mention the financial papers.
What’s the deal?
"We’ve moved quickly on from the meme stock crazes of the pandemic era, to a phase in the markets where new and experienced retail investors are hungry to capture yields on offer in cash and fixed-income markets," said Alex Campbell at retail investment platform Freetrade.
Alongside an uptick in base rate-linked exchange-traded funds, Campbell has seen a considerable rise in extremely short-term bonds.
For instance: BlackRock’s iShares Ultra Short GBP ETF, which provides exposure to investment-grade corporate debt, has seen a whopping 345% rise in buy activity since yields have reached a plateau.
“The income is attractive and the risks of capital loss are less severe with the short duration of the assets held by the fund,” said Campbell.
To add to that, investors are able to hold these in tax wrappers like an ISA or SIPP, shielding gains and interest from the tax man.
Retail investors see it as a no-brainer. With major banks offering crummy savings rates and restrictive withdrawal limits (all the while raking in juicy net interest margins), cash investments are simply offering better returns.
Challenger banks like Starling have stepped up competition to some extent, but with the Bank of England broadly expected to hold the base rate steady this week, “I’d expect to see more of these savings offers get pulled and reduced”, predicted Campbell.
“This will likely mean that we see cash investments start to outperform on a six to 12-month basis comfortably,” said Campbell.
It’s not just short-term investment seeing a surge in interest either.
In one eye-catching example, investors using Freetrade piled into the iShares 20 + US Treasury with a huge 256% uplift in buys in October.
“For those who are convinced that we’ve reached a turning point in the rate hiking cycle, the long end of UK and US curves are very attractive from a risk/reward perspective,” Campbell explained, though there is a caveat to acknowledge.
“If rates stay high for longer, this turning point may keep getting pushed back, adding pain to a trade that's now making the front pages of most financial press. Buyer beware!”
Are bonds cool now?
At smart money app Plum, a recently launched money market fund took off like a rocket, quickly accounting for 5% of all of Plum’s inflows. “That’s quite substantial within a very, very short space of time,” commented Rajan Lakhani, head of PR at Plum.
Lakhani explained that there is heightened demand for that yield when customers aren’t getting what they think they deserve from the banks.
It’s more than just yield hunting though. “Bonds have become interesting,” Lahkani exclaimed.
Lakhani explained that after this year’s mini-banking meltdown in the US, which led to the collapse of Silicon Valley Bank in March, there was a big shift from people putting money into banks towards looking at the money markets in order to diversify where they hold their cash.
“And we're seeing that trend come into Europe as well,” he stated.
Does that suggest a generational shift, as younger investors look towards boring old bonds as the new hot investment?
Perhaps.
Recent research from Charles Schwab (NYSE:SCHW) showed that Millennial ETF investors are gravitating toward fixed-income investments more than their older peers.
“Millennials are not only more interested in learning about fixed income, but more of them plan to invest in fixed income ETFs in the next year, and the asset class makes up a larger portion of their portfolios compared to older generations,” the research stated.
Freetrade’s average customer age is around 30 years old, a few years off the brink of the millennial-gen z border. “So this isn't an old and fusty thing!” said Campbell.
Millennials grew up in a period of immense economic uncertainty, punctuated by the great economic crisis, spiralling costs of living, an unfair housing market and stagnating wages.
It makes sense that they’re readjusting their risk/reward appetite. Perhaps that’s why they’re swapping out booze for cleansing juices too.
Digging deeper into US bonds
“There’s a fair amount of comment amongst institutional players saying that bonds, specifically US Treasuries, are a great buy at current levels,” said David Morrison at Trade Nation.
The 10-year Treasury recently hit 5% for the first time in 16 years, with some esteemed investors calling the floor on prices.
Bill Ackman, billionaire hedge fund manager and founder of Pershing Square Capital Management, recently closed out his shorts on US government bonds.
Bill ‘Bond King’ Gross, recently called time on betting against Treasuries too, predicting a fourth-quarter recession and the beginning of a sharp interest rate reversal from the Federal Reserve.
However, Morrison advised caution: “Others point to the huge amount of Treasury issuance coming due to the budget deficits and ever-rising federal debt, and the lack of political will/ability to do anything about it.
“This is inflationary, and as we’ve seen, bondholders hate inflation as they get paid back in deflated currency. In addition, the US Federal Reserve is reducing its balance sheet, and not buying bonds anymore, so there goes another support.”
Morrison noted that, while bonds do indeed come with less risk than just about any other security, “they can be incredibly volatile”.
He explained: “Unlike equities, bonds are designed for the investor/lender to get all their money back at the end of a fixed term, plus receive regular interest payments over the life of the bond.
“Yet intraday movements can be quite extreme for a supposedly safe investment. This affects bondholders if they wish to sell their positions before maturity.”
Furthermore, government bond issuers can, and have, gone bust before (though this has never happened in the US, so debt investors shouldn't stay up all night panicking).