In the Financial Times, John Plender suggests that market prices could soon be meaningful again, after years of central bank distortion. He writes:
It took a devastating combination of the pandemic, war in Ukraine and a central banking U-turn on inflation to do it. Since the turn of the year the rules of the game in markets have been dramatically upended. Gone are those notorious acronyms Fomo (fear of missing out), Tina (there is no alternative to higher risk equities and credit) and BTD (buy the dip).
The ecstatic equity market response to what were initially seen as dovish signals in the US Federal Reserve’s tightening move this week quickly evaporated — a mere blip in what is now clearly a bear market. At least sanity appears to be returning to central bank policymaking.
Having offered no convincing rationale for the continuation of their asset buying programmes long after the 2007-09 financial crisis, the central banks are now committed to raising rates and shrinking their balance sheets. That holds out the hope that after years of overblown asset prices and mispricing of risk, the information content of market prices will once again become meaningful.
The biggest indication of a semblance of normality is the decline in the number of negative yielding bonds across the world, down to about 100 compared with 4,500 such securities last year in the Bloomberg Global Aggregate Negative Yielding Debt index.
So the morally hazardous practice of paying people to borrow is on the way out, and the need to search for yield regardless of risk is becoming less intense. Benchmark 10-year US Treasuries are yielding close to 3 per cent, more than twice the level in late November. Since January, equity and bond prices have come down in tandem, so that a conventional 60/40 equity and bond portfolio has offered investors no diversification.
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