Real Vision Asks: Why Aren’t Bond Yields Rising?

Your Real Vision Daily Briefing for August 11, 2020

Senior editor, Ash Bennington, joins Tyler Neville to discuss secular stagnation and the financial chicanery happening in markets.

  • With stocks rising above global GDP, the increase in bond issuance has been electric while yields aren’t rising.
  • The future may see pension funds move out of bonds and into private equity.
  • As long as rates stay low and credit spreads stay low, we will likely see a great rotation into equities.

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The rotation out of bonds and into stocks that people talked about during the Great Recession may be occurring now, Real Vision’s Tyler Neville said during today’s Daily Briefing.

Neville said he believes we may see a correction in equities in the short term, but he is bullish over the long term – and stagnant bond yields have a lot to do with his thesis.

He pointed out that yields and spreads are at or close to their lows, high yield new issuance is up 79% year over year, and corporations raised a record amount of debt during the first trading days of August alone.

Neville said he believes that people are looking at the market through a political lens rather than a demographic lens, but demographics can further shape an investor’s understanding of what’s occurring.

He said that Baby Boomers are essentially forced to invest in fixed income, and the older they get the more goes into that allocation. They’re investing higher up in the capital structure because they’d rather take less downside than invest in new ideas, but the supply of new ideas is small compared to amount of capital that’s chasing it, which is why Neville thinks equities will see continued strength over the long-term as nominal yields stay low.

Neville also said that pension funds have put a lot into bonds and are getting very little in return and he expects to see funds rotate out of bonds and move into private equity. The risk/reward isn’t there when inflation is rising, he said.

As long as rates stay low and credit spreads stay low, Neville said he believes we’ll get the great rotation into equities. With the supply of growth small and amount of capital enormous, he doesn’t think we’ve yet seen the euphoria in equities at all.