Edmund : Hello and welcome to this new podcast by BNP Paribas Wealth Management. In this podcast, I want to talk about the extreme rise in bond yields that we’ve seen over the last few months and what opportunities this can represent for the long-term investor right now.
We should remind ourselves firstly that in September, the global bond market remained the centre of attention. Bond yields have gone up substantially in the last month. If we look at the 10-year US Treasury yield, you're at 5.3%. The German 10-year Bund, you're at 3.6% yield. And these represent the highest levels in the US since 2002 and in Germany since 2009. So yields have gone up a lot and you are presented with much more attractive potential income today. However, before buying, you always have to ask yourself, why have bond yields gone up so much? Three reasons. Firstly, globally speaking, inflation has remained above the target of central banks, which is 2%, for several years since 2022.
Secondly, oil prices currently are relatively high due to the Middle East conflict. And that is providing an extra surge in inflation and complicating the task of central banks who want to bring inflation back to 2%. And thirdly, the stock of debt, both public and private, is pretty high historically speaking at over 100% of GDP for public debt in the US, in France, and of course even over 200% in Japan. So you have high levels of government debt and budget deficits, which are increasing that stock of debt year by year. Following this sharp rise in bond yields and the consequent fall in bond prices, investor sentiment in bonds has become very negative today for good reason. People have not made any money in bonds for several years now, effectively. But I think this presents an opportunity. In the grand scheme of things, yes, we can argue a few things. Firstly, that bond yields, if we talk about 5.3% for the 10-year US Treasury or 3.6% for the German Bund, is not that high if you look further back in time than the last 20 years. If you look back to the 1990s, for instance, the US 10-year bond yield averaged 6.4% and ranged between 4% and 9%. So at 5.3%, we are in the range, but we're not even back to the average of the 1990s. And you can say similar for the German Bund. So if you were to look at the last 20 years, yes, bond yields today look very high. However, if you look further back, they're in the range, historical range, no more, no less. So I think we can argue this is simply a renormalisation and that the last 20 years were abnormal.
What we have today is a normal state of affairs for the global bond market. Where are the opportunities then? I think the opportunities will come if there is a calming of tensions or even a resolution of the Middle East conflict between the US and Iran. This could bring oil prices down. This therefore could reduce some of the inflation pressures in the global economy right now and make the job of central banks easier to control inflation. I think then central banks may simply not need to continue to raise interest rates, at least in the short term. This could lead to lower bond yields as well as a lower oil price and potentially a lower US dollar, which has been kept high by yields and oil. What would I therefore buy as a result of this scenario if it played out over the next few months? Three things.
Firstly, core eurozone bonds and investment grade credit, which are still offering very good levels of income to today, historically speaking. Secondly, stocks, particularly technology stocks, emerging market stocks and Japanese stocks, which have all performed very well this year and I think continue to have very strong fundamental momentum behind them. And thirdly, gold. Gold, which is benefitting from resumption of central bank buying, resumption of investor buying via ETFs, but which has nevertheless fallen something like 25% from the peak back in February.
And I think again, gold has been hit by higher bond yields, a stronger dollar. If the dollar comes down and yields come down, I would expect gold to rally. So there you have it. Core eurozone bonds. Technology, EM and Japanese stocks and gold, I think, are the three things to be buying over the next few months in expectation of a lower oil price and potentially lower bond yields.
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