Bond wobble underscores attract of money | USAEMALL.com

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In one corner of markets at least, it looks like the amateurs are outsmarting the professionals again.

A good majority of the big asset managers and banks had a clear view for this year that bonds are back. If that rings a bell then yes, we have heard this before. No, it didn’t really work out, due to the persistence of bonds’ mortal enemy: inflation. But for 2025, the message was clear: central banks are cutting rates and you won’t see yields like this again. Get out of cash, buy the bonds and lock those rates in.

The year has only just begun, and it is obviously unwise to read too much into ebbs and flows in markets in the opening days of the year. But it was bad enough that the huge ascent in bond prices that many big asset managers and investment banks had predicted for 2024 failed to materialise, and so far, as one professional bond investor put it to me, 2025 has been “annoying”. 

Bond prices have stumbled yet again because market participants are not just backing away from expectations for more bond-supporting rate cuts from the US Federal Reserve — they are flipping in the opposite direction. “Rate cuts were so 2024,” said analysts at Bank of America in a note after the recent “gangbusters” US jobs report. Now, the bank reckons the Fed stands pat for an extended period, but the conversation is “moving . . . to hikes”.

This is awkward for the “bonds are back” crew. In a note in mid-December, Richard Clarida from bonds giant Pimco (and formerly a senior official at the Federal Reserve), along with Mohit Mittal, pressed the case for getting in to bonds and out of cash. 

“The market landscape has transformed,” they wrote at the time. “Now that the Fed has embarked on a rate-cutting path, over-allocating in cash creates reinvestment risk as the assets rapidly and repeatedly turn over into lower-yielding versions of themselves . . . Relative to cash, where yields are dwindling as interest rates drop, bonds offer a more compelling opportunity.”

I’m not about to argue with Pimco about bonds, and over the long term, that is very likely to be right. It is a huge consensus call among big banks and investors — almost every one tracked by Natixis Investment Managers recommended avoiding cash this year. But the early 2025 wobble is unhelpful, and some (relatively) amateur investors were not convinced anyway.

“The big bond houses say now is the time to buy bonds,” says Norman Villamin, group chief strategist at Switzerland’s Union Bancaire Privée. “But our clients are smart. They are saying ‘why would I do that?’”

Villamin says his clients — generally wealthy individuals and families — are still more than happy to keep a large slice of their portfolio in cash, which pays a little under 5 per cent a year in the US and still 3 per cent on deposits in the Eurozone. That is still a huge win for investors who remember their rainy-day funds carrying rates of roughly zero. 

“The risk people need to wake up to is their bonds,” Villamin says. “Bonds are not pricing in the new inflationary environment.”

This obviously all depends on an investor’s time horizon. If you are willing to park money for 10 years, the bond yields on offer now are, once again, extremely generous by the standards of the past couple of decades. If you might need to dip in to savings more quickly, the risk of bonds declining in price is substantial, and cash is your friend. (Another Swiss private banker explained to me a few months ago that his rich clients never know when they might want to buy a new house or another yacht. I nodded. The struggle is real.)

Bonds are not supposed to be the sexy part of an investor’s portfolio anyway — they are there to provide a steady income and balance against racier stocks, which had a pretty good 2024, especially in the US.

Nonetheless, this market has not yet settled in to a new groove. Inflation eats in to the interest payments and overall returns on a bond over its lifetime, and it is not yet fully defeated. 

Cash specialists note, with some glee, that money still keeps pouring in, despite the rush to the exits that many predicted as the Fed started cutting rates.

“We don’t buy the narrative that investors are chomping at the bit to deploy all their cash to stocks and bonds as yields decline,” said Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes. She says many will be more than happy if the Fed’s terminal rate — its longer-term target — hovers around 3.5 per cent, particularly those who use cash primarily as a tool to pay expenses and other needs. “We think the [cash] industry needs to make space in the rafters [this] year to hoist yet another banner,” she says.

As usual, here we see competing world views from people with skin in the game, of course. Nonetheless, while bonds have been meandering, cash has proven far stickier than most asset managers had anticipated for several years now. It is a hard habit to break, and if you are still expecting this cash to burst out into riskier asset classes, you may be waiting some time.

katie.martin@ft.com