The third question is the biggest: Is 4.5% yield an opportunity?
One of the oldest tricks in real estate is comparison. If a real estate agent has an apartment they really want to push, they will never show it outright. Instead, they will show a client - a couple of bad apartments before that. Exasperated from the rounds and disappointed, the client is more likely to agree to the apartment the agent wanted to promote in the first place.
This very powerful behavioural bias, choosing the best from what is available rather than judging an item on its own merits, is called the ‘contrast effect’.
The market seems ravenous for bonds north of a 4 per cent yield and traders are determined to gobble up debt, against heavy issuance this year and despite central banks running off their balance sheets.
Are they right?
Is this a case of “the contrast effect” mentioned above? Are we simply liking a yield because it’s relatively high compared to the last 15 years, even if we know that it’s difficult to return to a low-yield world?
Or are investors simply loading up on bonds in anticipation of rate cuts (which should reduce yields and improve prices, all other things being equal)?
In a world with so much debt, where governments might even welcome a spot of inflation, is a 4.5 per cent yield for a mid-range bond still attractive, or is it the new norm?
Beyond geopolitics and Nvidia, I suspect this is the question that will define portfolio returns in the next few years.
George Lagarias is chief economist at Forvis Mazars
