Back to Blog feed

Trade War Volatility Maintains Grip on Bonds

4 December 2019 by Mark Holman

By now investors should be getting used to the ever more frequent hiccups in the trade negotiations between the US and the rest of the world.

Yesterday’s news that President Trump was in no hurry to sign a deal with China was not exactly ground breaking, but it should have reminded investors that pricing in a ‘phase one’ deal to close before the latest wave of tariffs comes into effect on December 15 was over optimistic.

We think this will be a theme that continues throughout 2020, with investors becoming overconfident and eventually being let down by the enormous complexities that are involved in negotiating trade between the world’s two largest trading nations.

While the direction of travel on trade might be a lot more conciliatory today than it was earlier this year, the path is a multi-year journey and at least for now it is one of the key drivers of investor sentiment, as well as of course being a crucial factor in business confidence.

For fixed income investors the hiccups are felt with sharp rallies in ‘risk free’ assets and a lack of enthusiasm for credit assets, but the real damage is that done to the economy, which gradually edges us closer to the end of the cycle each time business confidence is dented.

Yesterday’s price action was exactly as we would have expected, and the impact on portfolios no shock. However, it is also a reminder that being overly tactical with US Treasury or other ‘risk free’ rates positions is one of the most difficult things for bond investors to do well consistently, because by definition they react to surprises.

We also know that when the end of the cycle finally arrives it will be this portion of the fixed income market that protects portfolios most. Consequently being far more strategic with ‘risk free’ rates should be the best way to maintain lower volatility while uncertainty persists, especially when valuations are elevated.

Disclaimer

FOR PROFESSIONAL INVESTORS ONLY. NO OTHER PERSONS SHOULD RELY ON THE INFORMATION CONTAINED HERE.

This material is for information purposes only. Any views expressed are those of the author, and do not necessarily reflect the views of TwentyFour. TwentyFour does not warrant the accuracy or completeness of any information contained herein, and therefore it should not be considered as an indication of trading intent, personal investment advice, or a basis on which to buy, hold or sell any investment vehicle/instrument. As such, TwentyFour accepts no liability for any use, or misuse, of the material in this commentary. This material may not be reproduced, in part or in whole without the express prior written permission of TwentyFour.

Please remember that all investment comes with risk and positive returns are not guaranteed and you may not get back what you invested. Investing in fixed income securities comes with credit risk, default risk, inflation risk and interest rate risk.