Buying a
bond is a little bit like shopping for clothes. You want to find the perfect fit: something not too short, yet not too long; something daring but yet not too risqué, basically something that can return the result that you have been expecting when buying that particular product.
Investors have been on a frantic shopping expedition in bond and equity markets so far this year, causing valuations to go up and returns to fall considerably. The issue that we now face is that the market has been shopping for quality and junk, and it is very hard to understand why investors have been adventuring within the weakest pockets of the economy, especially amid talk of a global slowdown and a global policy panic.
The rally we have experienced thus far can only be ascribed to dovish central bank policies. Investors are betting that they will be successful in supporting the economy and market valuations, hence we came from a dreadful sell-off during the fourth quarter of last year to a whatever-you-can-eat frenzy that has pushed risky assets higher. The most worrying news I’ve heard in the past few days is that Bitcoin jumped 21.5%, just a after a market-wide rally caused by better-than-expected PMI numbers in China. This clearly shows that instead of buying on fundamentals, markets are actually buying on sentiment.
This forces us to take a reality check, especially in the corporate space. Are corporate bonds in the junk space and in emerging markets really worth our money?