Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., February 15, 2022. REUTERS/Brendan McDermid

LONDON, Feb 18 (Reuters) – Inflation is raging, interest rates are rising and bonds look like treacherous investment waters – all arguments for a return to the fixed income vortex that intrigues for the least.

Granted, it’s been a bad year so far for most asset classes, with the exception of oil and commodities.

But the most interest rate-sensitive stocks, or long-lived games, have been under the cosh. Government bonds lost 5-6% while US tech stocks fell more than 10% – and fund managers are heavily underweight in both, with an overweight in global equities and cash.

Mutual fund data shows two straight months of global bond fund outflows – a cumulative outflow of $32 billion for the year to date.

Soaring oil prices, war-related tensions in Eastern Europe and central banks anticipating a return to pre-pandemic monetary settings are stirring the waters for investors who once again fear the end of the 40-year bond bull market.

But JPMorgan’s long-term strategists take a different approach and filter out all the turbulent news, macro forecasts and tactical trading views to model the performance of the 10-year mixed portfolios based on past performance.

Jan Loeys and his team this week updated their view on the potential 10-year returns of a standard 60/40 stock/bond portfolio and said the recent asset price slump has significantly boosted their expected returns relative to a year ago.

By forgoing different approaches to macro factors – which may be valid but impossible to predict with certainty over 10 years – the JPM team has insisted that the best guide to bond returns over the next decade has always been yield. dominant.

The jump of more than a percentage point over the past year in the yields of aggregate U.S. bond indices – which include treasury and agency bonds as well as investment grade and high-yield debt – places now the current yield at around 2.7%.

Crucially, it makes them positive again in real or inflation-adjusted terms when 10-year market inflation expectations of 2.4% are used as a guide.

Along with a pullback in US equity multiples that improve their outlook for annual returns over the next decade to 4.8%, JPM estimates that the outlook for a 60/40 blended portfolio was now 4% annually. That’s a full percentage point higher than last year and 1.6% positive in real terms – though it remains historically unattractive and well below the 5% real average of the last century.

But their conclusion was that this improvement in mixed yields might be enough to deter investors from the TINA (there is no alternative) phenomenon that has at least partly driven stock prices soaring as bond yields have been floors in recent years.

“The urge to overweight equities to bring portfolio returns closer to its needs has waned,” they told their clients. “At the margin (it’s) a reason to start rebalancing towards bonds, without having to be in a hurry.”

CONDITIONS TO THE LIMITS?

While hardly a consensus, this view fits some fundamental arguments – such as central banks acting fast now; rising inflation rates and improving real yields; cooling growth and flattening yield curves; and the idea that any positive real return on “safe assets” is currently attractive to risk-averse funds.

The dynamics of the “defined benefit” pension fund industry, for example, were widely cited last year as a major factor driving the yield curve and weighing on long-term returns, outsized gains on actions accelerating full funded status and massive risk reduction. ” Bond-only portfolios.

For more tactical active managers, there are also signs that this last volatile period may have exaggerated the bond gloom.

PIMCO chief investment officer Dan Ivascyn said this week that his portfolios remained underweight in terms of bond duration, but valuations had now become more attractive. “I don’t think we’re too far off from the levels where we’ll start reducing that duration of being underweight.”

Even chartists charting 10-year Treasury yields believe calling the end of the 40-year bond bull market would be at least premature. Read more

The main criticism of this long term view of JPM is of course that it relies on past performance as a guide – reasonable unless you think we are in a paradigm shift in the global economy where returns bond and credit spreads have nowhere to go but up.

Newton Investment Management managing director Euan Munro wrote this month that the markets had reached such “boundary conditions” and that this should force a rethinking of 60/40 portfolios towards a more diversified and actively managed bond portion in the less.

His main point of contention with modeling based on historical price performance was that it actually assumed a dubious view of the future repeating the recent past.

“Those who apply such an approach make – or at least imply – a fairly detailed forecast of future market conditions, whether they are aware of it or not.”

Place your bets now on 2032.

The author is Finance and Markets Editor at Reuters News. All opinions expressed here are his own.

by Mike Dolan, Twitter: @ReutersMikeD; edited by David Evans

Our standards: The Thomson Reuters Trust Principles.