Bonds: 2018 Still No Breakthrough

Bonds are not a real alternative in 2018. As rising interest rates depress prices, a sizaeble interest rate level should be awaited.

At some point it had to come. The recent collapse of stock markets just after the fifth week of the year raises the question of whether bonds in 2018 will rise again from the ashes.

When the rally of stocks comes to an end, actually offers a switch to interest rate securities. But first, a few cloudy days are a long overdue correction if necessary. And secondly, even 2018 bonds are not yet a real alternative.

Bonds remain 2018 not a real alternative

As an investor, you should wait until a decent interest level is reached again. After all, bonds are subject to their own dynamics: an increase in interest rates depresses the price of the outstanding securities. This can be more frustrating than offsetting stocks.

In any case, given the recent slump, the outlook for an unscheduled rate hike by the US Federal Reserve played a role. The reason for this was the unexpectedly pronounced wage growth in the USA. In order to counteract escalating inflation, interest rates are usually raised. But if money and credit become more expensive, this slows down economic growth. Higher interest expenses and wages are also denting corporate earnings.

Sure, the days of perpetual zero interest seem counted. Cheap money, which first supported and then boosted stock markets since the financial crisis of ten years ago, is no longer necessary given the stable economic development.

Between restlessness and low level

Over the next few months, it depends on how interest rates and equities develop. Should equities continue to rise and interest rates rise at the same time, there will be pressure on the prices of bonds. When the bond market becomes uneasy, yields fall in the medium term.

It is different if the stock markets continue to give in and interest rate increases are initially suspended. In that case, quite a few investors will have switched to bonds and with supported prices, it may at least be worthwhile to hold the papers.

Overall, you can hardly earn money with 2018 bonds. At least not with federal papers. But also government bonds from Spain or Portugal do not throw anything off. Similar to the picture for corporate bonds . The companies with sufficient creditworthiness are generally so good that they do not offer high risk premiums. And thanks to the stronger euro, foreign currency bonds no longer offer additional income.

Emerging economies offer more

Somewhat different is the outlook for emerging market bonds . Especially if they are in local currency. If the stable state of the global economy continues, many currencies will be able to grow strongly with falling inflation rates. In any case, the growth rates are usually above the average of the established industrialized nations.

In addition, many threshold residents were able to reduce their debt ratio significantly in some cases. Central banks also signal a slow but steady normalization of their monetary policy. The result is moderately rising interest rates, which continues to support the bonds. For emerging market bonds, returns over 7.5% are not uncommon.