Moneycontrol Pro Panorama | Making bonds great again  

Bond markets have regularly taken hostages and the current rout in US treasuries is nothing new.

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Making money through fixed income investment is not for the faint-hearted. Bond markets have regularly taken hostages and the current rout in US treasuries is nothing new. How to maximise returns when interest rates are rising incessantly and even risks are climbing a new mountain every day? This is an eternal question and, in the answer lies the line that separates smart investors from, well, the not-so smart ones.

Bill Ackman, chief of hedge fund Pershing Square, turned out to be smart when he covered his short positions in US treasuries, making a killing in the process. Taking a short position means to bet against the asset, in this case 30-year US treasury bonds. Remember, Ackman had bet against them in August which he now reversed by covering his position. This is a complete U-turn for him. With a pithy message that “there is too much risk in the world to remain short bonds at current long-term rates” on social media platform X, formerly Twitter, Ackman’s position change signalled that perhaps long-term bond yields have peaked.

Indeed, he believes the US economy is slowing faster than what data suggests. Pimco’s Bill Gross, called the bond king, also believes that we should stop betting against them even though investors are headed for a third straight year of losses on their bond holdings.

The belief is that the US economy will slip into recession in the fourth quarter. In the third quarter, the US economy notched up 4.9 percent growth, the highest in two years, the latest data shows.

There is another argument that the ongoing geopolitical tensions triggered by the Israel-Hamas war would logically result in investors scurrying for safe-haven treasuries. That should offset some of the upsetting yield increase. This is why fixed income analysts want investors to jump in right now as treasuries look like bargain buys. Elsewhere, investors are coming back to the US junk bond market in the hope that there is money to be made here as these high-yielding notes start to capture the general increase in interest rates progressively. This piece in the Financial Times captures this trend.

When junk bonds are looking good, emerging market economies would also find takers, right?

For Indian bonds, this has been one of the better years in performance. Geopolitical tensions, the surge in oil prices or even the US treasury bond rout, nothing has dampened the sentiment here. The 10-year government bond yield has risen by a mere three basis points ever since the Israel-Hamas war broke out that sent oil prices soaring roughly 10 percent. Domestic fund managers are certain that Indian bonds will see demand for them outstripping supply. Hence, captive investors such as banks are hopeful of keeping treasury losses at bay or even making some gains.

Where bonds can gift big gains (like for Ackman), they can also turn balance sheets to dust. China’s leveraged real estate developers are learning this hard lesson now. This week, Country Garden was the second large issuer to miss honouring bond repayments to investors. Holders of Chinese bonds are facing their worst fears now. UK lender Standard Chartered Bank’s profits were hit due to its exposure to Chinese commercial property.

What does all this tell us? Not everyone can be Bill Ackman. Also, Ackman cannot be right all the time. Reading bond markets is likely shooting a bullet in the dark. You may hit the target, or the bullet will ricochet and hit you. Sounds like a deadly market but ironically, there is no safer investment than fixed income. It is after all called the retiree’s product. Let's make bonds great again.  

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Aparna IyerMoneycontrol Pro