bSomeone else claims that there is a lack of irony in investing. For a good decade, almost no one was interested in bonds given the long period of zero interest rates. Since the central banks began raising interest rates at an unprecedented pace last year, the investment world has known almost no other topic. What a volte!
Interest-interest securities are being discussed again because they behave in an unusual way that has rarely been seen in their history. First of all, there is the catastrophic year of 2022, in which the prices of European bonds fell by almost 20 percent.
Something like this only happens very rarely in the history of financial markets; after all, bonds are supposed to stabilize the portfolio. However, they have the unpleasant property that their prices fall when general interest rates rise. Because the European Central Bank (ECB) implemented the interest rate turnaround at a rapid pace, the effect on prices was even greater.
A portfolio that the FAS has been examining at irregular intervals since 2016 under the name “Wunderportfolio” also suffered from this and which has impressed most of the time with its exceptional performance. How it works exactly remains to be explained. At this point it is important to know: It is precisely this good development that is at stake since another rare constellation has emerged on the bond market.
The experts speak of an “inverted yield curve”. However, that is just a complicated description of an unusual phenomenon: higher interest rates are paid for short terms than for long ones. Federal bonds with a two-year term currently yield 3.0 percent, while papers with a ten-year term only yield 2.6 percent. Usually the relationship is the other way around because it is riskier for investors to lend their money over a longer period of time. Accordingly, they would like to be rewarded for this risk with a higher interest rate.
Things only turn upside down, so to speak, when investors are more worried about the immediate present than the future. Then they demand higher returns for short-term investments than for longer-term investments. This is the case, for example, when investors expect a recession, i.e. a significant economic decline. Anyone who has followed the economic news of the past few days will notice: This is exactly where we are right now.
All hell with bonds
Which brings us back to the miracle portfolio. This admittedly somewhat full-bodied name hides a portfolio of two ETFs, the performance of which is calculated by the analysis house Envestor for the FAS. The assumption was that this combination, made up of a stock and a bond ETF according to foolproof rules, would perform better than the funds of well-known investment managers.
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