Buttonwood: The bond bears

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Inflation is falling but bonds are unloved

IF THERE is a consensus bet for 2014, it is that equities will continue to outperform government bonds, as they did in 2013. But the odd thing is that, if investors relied on the usual fundamental factors, the evidence would seem to point in the opposite direction.

Take equities, where the strength of corporate profits might seem the most crucial factor for returns. Thomson Reuters recently calculated that 103 companies in the S&P 500 had issued negative guidance on profits compared with just nine that have been positive—the worst ratio on record. Analysts are downgrading their forecasts for fourth-quarter profits at a rapid rate. But the bad news has barely affected the buoyant stockmarket.

When it comes to bonds, inflation has generally been the key determinant: rising prices reduce the buying power of fixed-interest payments and principal. The 1970s was a catastrophic decade for the bond markets. But in 2013 the general …

Link to article: www.economist.com/news/finance-and-economics/21591875-inflation-falling-bonds-are-unloved-bond-bears?fsrc=rss


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