Time to sell Bonds

Is it time to buy bonds and sell equities or sell bonds and buy equities? May be it is time to sell both. We are pretty sure about one thing: that it is not time to buy both. Interest rates are at the lowest level and the only thing they can do is to go up again. Now the question is: When the interest rates in the Us and Europe will start to rise, where we can expect the higher impact, in the equity markets or in the bond markets? Economic theory teaches that both markets will suffer. Which will suffer more? The difference stays in the other elements that can differently affect the two markets.  The most important are:

  • The economic growth and the profit of the companies listed
  • The expected inflation
  • How fast will rise rates

If the economic growth accelerates in the next two years as expected by the World Bank and IMF, we can also expect to see higher profits by the companies, rising dividend yields and investors to prefer equities. In normal conditions the equity markets should have perform worse than they have performed.  This has happened not because the economy was growing so fast but only because of the QE. Now that the economies and job markets are getting stronger we can be optimistic about the economic growth and the profit of the companies.

If inflation starts to wake up in the next two years, the same have to do the nominal bond yields as they have a positive correlation pushing the prices down. The total impact can only be negative on the performance of bond funds.  The strongest reason in favor of a rising inflation is the excess money that has been printed by the Central banks on both sides of the Atlantic.

If the rates will rise too fast, it can be very dangerous also for the equity markets because these markets are always more reactive than the bond markets. So the equity markets may over reacts to a strong declaration coming from the central banks in the direction of a rate hike. However investors are pretty convinced that the central banks will react very slowly to a growing inflation, due to fear of damaging the growth. The low prices of commodities around the world and the appreciation of the dollar will help on controlling the inflation for some time.

Three years before, some managers of bonds funds admitted that, not buying bonds till that moment has been the worst error. Definitely they will not need to write it after three years, if they sell now.

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