Chris Joye talks a little more sense on bonds

Better work from Chris Joye this week on bonds as he abandons the worst of his arguments about the benefits of floating rates. However, his main purpose seems to be to distract from his prior poor arguments and so he builds an irrelevant straw man and then demolishes said straw man.

In his original piece, that we pointed out was nonsense, Chris claimed that floating rate bonds could cure all evils, illustrated by looking at their benefits and then ignoring the weaknesses.

This week, Chris builds a straw man that fixed rate bonds must have a negative correlation to be of any use and then shows that they have a zero correlation.

The thing is that zero correlation is fantastic! If you can find assets that have a zero correlation, especially over the long term then that’s a great hedge. The straw man that bonds have to have a negative correlation to be of any use is a smokescreen.

Chris goes on:

The take away is that fixed-rate bonds are an incredibly unreliable hedge, and more likely than not to amplify, rather than mitigate, equity losses if you live in an inflationary world.

Last week it was equities smoked and bonds getting “concurrently hammered”. In actuality, equities were down 6% while bonds were off 0.1% – hardly concurrently hammered. This week bonds are “an incredibly unreliable hedge”, but the important part of that statement is in the final throw-away line “if you live in an inflationary world”.

If you ignore the hyperbole, what Chris is saying is that if there is an inflation outbreak then both bonds and equities will fall together, which is right.  But inflation is not rising in Australia, and when inflation is not rising then fixed rate bonds are usually (but not always) a good hedge.

The net argument in his two articles is that when inflation and interest rates are rising you want to own floating rate rather than fixed-rate bonds. And he is right if inflation and interest rates are rising. But Chris spends far too much time trashing fixed rate bonds in disingenuous ways, and no words at all on the most contentious part of his investment thesis, whether inflation and interest rates are rising.

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Damien Klassen

Damien has a wealth of experience across international equities (Schroders), asset allocation (Wilson HTM) and he helped create one of Australia’s largest independent research firms, Aegis Equities. He lectured for over a decade at the Securities Institute, Finsia and Kaplan and spent many of those years as the external Chair for the subject of Industrial Equity Analysis.
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