Apologies again for the absence. Eumaeus (and Ulysses) were far away from their homeland for many weeks, and missed the market hell of the past few weeks. More on that later.
Meanwhile, the chart above shows the total return on 10 year gilts against total return on the FTSE, which I have been following for a long time, and which I last discussed in January 2021 here.
It’s kind of obvious. From 1993 to 2021, the cumulative total return on 10Y gilts, which comprises capital gains and coupon, has kept pace with the cumulative total return on the FTSE, comprising capital gains and dividend income. Up to that point, so much for the theory that stocks will beat bonds “in the long run”.
But the bull run on gilts was built entirely on the prolonged fall in interest rates over that whole period. Now that the inevitable has happened, i.e. gilts have returned to something like a normal yield, and with a vengeance in the last few weeks, the discounting effect kicks in and capital gains turns to capital losses.
You may say that this is the end of it, stocks win hands down, but actually that’s not obvious. The 10Y gilt yield, when that chart was produced just after the Bank gilt-buying adventure, was 4.16%. Now (October 10) it is 4.43%. If the long term yield stays at that level for the foreseeable future – and note that it could well rise further as the market demands compensation for anticipated inflation – then that yield will be above the FTSE dividend yield of around 3%. Bonds could still beat stocks in the long run, whatever the long run is.
I will follow up the implications for the now infamous “liability driven investment” strategy in the next post, so stay tuned.