Date
20 September 2017
Year to date, UK government bonds have rewarded investors with a total return of 13.7 percent, the best in the govenment bond sector. Photo: Internet
Year to date, UK government bonds have rewarded investors with a total return of 13.7 percent, the best in the govenment bond sector. Photo: Internet

What to do when yields keep falling

Traditionally, investors purchase bonds for their stable return.

As bond yields continue to drop, and numerous government bonds are offering negative return, stocks that pay relatively steady dividend have become highly sought after.

Year to date, British government bonds have rewarded investors with a 13.7 percent return, the best in the government bond sector.

Meanwhile, the Utilities Select Sector SPDR Fund, a US utility exchange-traded fund, has soared 20 percent since the beginning of the year, a performance that has been matched by Hong Kong’s Link REIT (00823.HK).

In the ’90s, even fund managers specializing in growth stocks could hardly generate such high returns.

Suffering from the toxic legacy of the 2008 financial crisis, global interest rate levels continue to hover near zero percent, and that has clearly distorted the financial markets in a substantial way.

The trend has been going on for years, but it has just become more extreme lately following the Brexit vote.

Nothing goes up forever, but the question is how long will this abnormal situation persist? Or what will trigger global rates to go up?

As always, it’s easy to notice that the investment space for bonds and defensive stocks has become too crowded already, but it’s a lot harder to tell when the unusual situation will reverse.

Investors who are not happy with the low yields can choose to walk away. But one can easily get burned by betting against the trend.

A State Street survey of institutional investors found out they are still expecting to earn 10.9 percent return annually for the next five years.

I’m wondering how exactly they are going to achieve that lofty target.

This article appeared in the Hong Kong Economic Journal on July 15.

Translation by Raymond Tsoi

[Chinese version 中文版]

– Contact us at [email protected]

CG

Columnist at the Hong Kong Economic Journal

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