While January was a very pleasing month for the NZ sharemarket (up 4.6%), bond (or fixed interest) investors actually suffered negative returns. For example, the ANZ NZ Government Stock Index was down 0.3% for the month.  It was the same globally with international sharemarkets strong but the global bond index down 0.4% for January. 

Some investors may be surprised you can get negative returns from “safe” investments like bonds.  It doesn’t happen very often but it was also the case back in 1994 when a significant rise in interest rates resulted in negative returns for bond investors. 

These negative returns come from investors moving out of bonds and into shares.  It causes interest rates to go up and the market value of these bonds to go down as we saw in January. 

Poor or even negative returns from bonds (government and corporate bonds) could be a major investment theme for 2013 as there is the potential for interest rates to rise further from the current very low levels due to: 

– investors having greater confidence in the sharemarket outlook  and selling out of bonds as they seek higher returns from shares; and

– perceptions of improving economies causing investors to think that interest rates have bottomed and will move up from here. 

Linked to this would be any change in perceptions about the potential for inflation to re-enter the economic system. There is an increasing inflation risk with some Northern Hemisphere Central Banks effectively printing money to inflate their way out of high debt levels.  This is a balancing act for Central Banks who may not be able to get the inflation “Genie” back in the bottle if it does start to emerge. 

The potential for inflation around the world is certainly something we will be monitoring closely at Milford as it would be a major shift for markets to adapt to after the past 5 years of minimal inflation levels and therefore low interest rates.

Anthony Quirk

Managing Director