Tom
Scollon
Chief Editor |
There has been much written in the last week about bonds, interest rates and equities - almost too fashionable for me to write about - forever the contrarian! But, as some of what I read was so erroneous I could not resist the urge to cover the subject as this is an important theme whether you are a futures trader, exporter, bond trader, equity investor or even carry a mortgage and you are concerned about where interest rates might head.
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Before delving immediately into the finer points, let us look at the basics. In the Australian market, investors are less aware of bonds as is the case in the USA and some other western economies. In other countries, bonds are an integral part of investment portfolios and are much traded by market players. As such their price will reflect "perception" of the economic world and where it is headed. Interest rates are perhaps the greatest determinant in that "perception".
The economic relationship between bonds and interest rates is an opposite one: if interest rates rise or are expected to rise then bond prices fall as the value of that bond, at a fixed rate of interest, has fallen as a better interest rate has now become available.
Interest is a cost in all aspects of running a business - even though you might be debt free in your business - costing of all inputs will be effected indirectly and so that increased cost and therefore reduced profits will be factored in and shares become generally less attractive. This is a précis of what is a very complex economic subject.
Thus bonds and equities move in the same direction over time - that is both in the opposite direction to interest rates. You can see this overall same directional trend in the SFE 10 Yr Bond and SPI 200 monthly chart below. There are periods of divergence, for example 1997-1999, but the overall trend is in a similar direction. Note this is where it is important to choose the appropriate period chart - looking at a daily chart would give you an entirely different perspective
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