Why The Worlds Most Boring Asset Is Beginning To Rock

Imagine this.

You’re standing on the harbour bridge looking down at the Opera House and next to it you see a two-person tent.

If the tent was the stock market the Opera House would be the bond market.

And just like the Opera House, people eventually take the bond market for granted and head up town looking for something more exciting.

But for the first time in years, investors are heading back to the Opera House.

The place is beginning to rock!

So what is a bond?

A bond is a like a term deposit. It’s a loan.

Investors lend money to an entity (government or corporation) in return for a fixed rate of interest.

The only difference is bonds are bought and sold on an open market which means they fluctuate in price.

And like term deposits, (government) bonds are generally regarded as one of the safest forms of investment.

Oh so boring, but oh so safe.

Yet despite their vanilla flavoured dullness, bonds are still the most important asset class in the world for two reasons…

Firstly, they’re a lead indicator.

In March 2021, I sent a video to our clients warning them interest rates would go up much sooner than 2024.

The bond market was singing like the New York Symphony Orchestra suggesting inflation was about to scream and rates would follow.

The RBA cash rate was 0.1% but the bond market was bellowing 1.25%, soon.

The same indicators are now suggesting the RBA cash rate will land somewhere between 4-4.5%.

Secondly, the bond market will wield significant influence over other markets for the next decade.

Before Christmas, we began putting clients into bonds for the first time in more than ten years.

Bonds were heavily sold off during 2021 and by Melbourne Cup Day were showing attractive yields of 5% plus.

Meanwhile, stock and property markets were still yielding 2-4% and facing a potential financial cliff.

Bonds will become a genuine investment alternative to stocks and property over the next decade because they have a much lower risk profile with higher returns.

And if rates continue going up, there could be a mass exit out of the tent into the Opera House.

Have a great weekend!

Adam

Back paddock – if you have more than three priorities, you have none. Jim Collins, Good to Great.

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Thanks for dropping by.

This information is general in nature and should not be deemed as advice. Please seek your own financial advice specific to your own financial situation.