International Offshore Bonds
With every fall in the bank rate, the attractions of the international
bond market get bigger. When the Fed cut the US bank rate by 0.5
per cent in late December, the markets responded with an almost-instant
drop of 0.35 per cent in the bond yield - which is another way of
saying that bond prices rose sharply around the world.
Indeed, the average ten-year bond investor saw the capital value
of his investment rise by around 7 per cent in a single day (because
typical yields before the yield cut were around the 5 per cent mark):
the only reason that bond yields didn’t drop by the whole
0.5 per cent, as with the bank rate, was that investors were also
having to take into account the beneficial effects that the rate
cut would have on their equity portfolios, which were also competing
with bonds.
International Offshore Bonds - Equities Win Hands Down
If you’re confused by all this, all you really need to remember
is that bonds are continually forced to compete with equities and
with bank deposits - and that, under normal circumstances, equities
win hands down. The time when bonds come into their own is when people
are feeling fearful about equities - because owning a bond gives you
the indestructible knowledge that you’ve locked yourself into
a guaranteed rate of interest (the bid yield) until the day the bond
eventually expires. That thought counts for a lot when you’re
feeling unsure of yourself.
International Offshore Bonds - Enough Evidence
But oddly, there isn’t enough evidence yet that investors are
turning to bonds, either in the US or elsewhere. Indeed, bond yields
have actually risen fractionally since December, even though the equity
markets have been stalled. That’s a puzzle which we don’t
have all the answers to at the moment, but it seems that US investors
are holding back because they still want to believe in the equity
revival. They might be right, they might be wrong; maybe it’s
better to wait on events for a while. But, if there’s the
slightest indication that the US is getting into real trouble this
year, getting some of your money into bonds as soon as possible
might turn out to be one of your better investment decisions.
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