A turning point has occurred in the bond market. As a result of rising interest rates, according to asset manager Mathias Beil, the “TINA” principle has become obsolete and “BARBARA” now applies instead.
• For years there was no alternative to stock investments
• Interest rate increases are now making bonds more attractive again
• Expert still advises caution on the bond market
After years of ultra-loose monetary policy The largest central banks around the world have tightened the reins of monetary policy. This has an enormous impact on the bond market, because thanks to the improvement in real interest rates, bonds are becoming more attractive for investors again. That’s why the principle “TINA” (There Is No Alternative) is now followed by “BARBARA” (Bonds Are Really Back And Really Attractive), says Mathias Beil, head of asset management at Hamburg-based Sutor Bank, according to “finanzwelt”.
What TINA is all about
According to the Financial Times, the acronym TINA came from an analyst at Charles Schwab. It describes an investment recommendation according to which there is no alternative to a particular asset – usually because other assets provide too low a return. Especially after 2008, investors liked to use this formula for stocks. In order to mitigate the effects of the financial crisis, the world’s largest central banks have drastically reduced their key interest rates to a level of one to zero percent within just a few months. Something similar happened at the beginning of the COVID-19 pandemic in spring 2020. The ECB, for example, not only sharply reduced interest rates, but also bought billions of dollars in bonds.
Due to this ultra-liquid monetary policy, stock markets performed strongly between 2009 and the end of 2021, despite the aftermath of the financial crisis and later the COVID-19 pandemic. This was due to the fact that due to the historically low level of interest rates, fixed-term deposit accounts and bonds yielded virtually no returns. Investors therefore liked to refer to the TINA principle: According to this, there was no alternative to equity exposure, even for risk-averse investors.
“BARBARA” replaces “TINA”.
But now circumstances have changed. The enormous flood of money has led to significant inflationary pressure in many countries, which prompted the central banks to change course at the beginning of 2022: They quickly raised their key interest rates sharply and ended their bond purchase programs.
As a result, “TINA” has had its day, and instead it is now time for “BARBARA” (Bonds Are Really Back And Really Attractive), says Mathias Beil, because “after a tough year in 2022, the yields on US government bonds have returned to the level of Real interest rates have been pushed forward. This is now also happening in Germany,” “finanzwelt” quoted the head of asset management at Hamburg’s Sutor Bank as saying. Because “in view of the latest inflation data from Germany, we are now on the verge of a rise in real interest rates in this country,” says Beil. This means that positive returns can be achieved again after inflation is deducted, making bonds more attractive.
Pay attention to quality
But even though bonds are back, according to the wealth expert, he still advises caution. Because “the BARBARA principle does not only offer positive news for the bond market. The quality aspect should always be kept in mind when selecting stocks,” says Beil.
The expert warns that the number of bonds with poor credit ratings is currently increasing. In his opinion, investment grade status is the minimum for exposure to the bond market. He therefore considers government bonds and selected corporate bonds, such as those from Porsche or VW, to be promising.
Recession in sight
The question of recession is likely to be of central importance for further developments on the bond market: “Current interest rate forecasts are that we can expect interest rate cuts at the end of 2024. Economists expect a slight recession for Germany, but the forecasts for 2024 are certainly better,” explained Beil. “A crucial point is whether and how the recession comes. If this is the case, corporate profits will come under pressure. If there are subsequent defaults on the bond market, refinancing costs will tend to rise,” said the expert.
Editorial team finanzen.net
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