Bonds markets: What have we learned in the last 10 years?
Partner Insight: Fidelity portfolio manager Kris Atkinson wonders when other market participants might wake up to the increasing risks we are seeing in the market ten years after the last crises
For a couple of years now I have been cautioning anyone who would listen that corporate balance sheets look distinctly "late-cycle". This debt-fuelled anxiety has become increasingly fretful as the number of flashing warning signs has increased, but up until recently few people seemed to be paying any attention.
Ten years on from the demise of Lehman Brothers we see that:
- The longest US equity bull market of all time
- For the most part, interest rates still at emergency levels
- US$10trn of negatively yielding bonds
- The worst 10-year return from commodities and cash since the Great Depression
Most concerning for me is the excess in corporate leverage built up in the global system. Until recently, I have struggled to identify a catalyst that would actually lead this to have an impact on returns but today I see a plethora of potential fire starters that could usher in a more nervous approach to risk-taking.
The first and most obvious catalyst is the now synchronous withdrawal of central bank liquidity. The Federal Reserve raised rates again in September and the market continues to price in quarterly hikes into 2019. The ECB is also expected to halt asset purchases and the market is beginning to price in hikes for 2019. When that happens, markets may at last begin to realise again that fundamentals do matter.
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