US Bond Funds

Please accept our apologies for banging on so long about America, but it now accounts for over half of the world’s total stock market wealth (compared with a third in 1992), and it’s also the biggest single influence on the bond markets.

When America buys bonds, it creates a tighter market all round the world; when it sells them, it swamps the markets. Once again, that’s simply a statement of fact. An imbalance or a temporary lunacy in the States creates an imbalance everywhere else. And that’s where we are now.

It doesn’t get much more lunatic than the present situation with US bonds. The 10-year Treasury bond is paying a handsome dividend yield of 6.8 per cent - whereas you’d be lucky to get even 1.9 per cent out of a typical US stock, or 1.4 per cent from a high-flyer.

US Bond Funds - Figure From Bonds

US Bond Funds & America

So why aren’t the good people of America rushing to empty their bank accounts and put their savings into bonds? Firstly, because they’re not holding much cash anyway - it’s all being either spent or else invested in stocks. Secondly, because they’ve more or less stopped caring about dividends altogether, so anxious have they become to cash in on the equity boom. And thirdly, because they’ve been offered a raft of special tax incentives to build up their own pension funds instead of relying on state handouts in their old age, and they’ll always prefer equities to bonds for this purpose.

Not for the first time, we’re looking at a one-off situation in America which has challenged the conventional wisdom about the international balance between stocks and bonds. But it looks solid enough from where we’re standing. Better get used to it.