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So you want stock TIPS?

How much money would you need to invest in 30 year TIPS to preserve $1,000 of purchasing power?
Duncan MacInnes
Fund Manager

This month’s chart shows a profound change in the investing landscape. Just two years ago, if a saver wished to teleport $1,000 of purchasing power 30 years into the future, at the low of -0.5% real yields, it was necessary to set aside a staggering $1,190. Life has recently become easier: with real yields much improved at 2.3%, the same goal can be achieved by setting aside just $490. 

This hasn’t gone unnoticed. Investors have been buying bonds at a fair clip in recent weeks, and prices have already moved since the Ruffer portfolio took a 10% position in US ten year TIPS last month. 

So is this the beginning of the end of the precipitous bear market in bonds?

Last year, the aggregate US fixed income market notched up its worst year since 1871, and US Treasuries are on track for three consecutive years of negative returns – something that has never happened before. Everyone now knows bonds have been terrible. 

Why? The story goes: there’s a buyer’s strike, western governments are bust, the bond vigilantes are back etc. Surveying the wreckage, the long US government bond ETF (TLT) is down more than 50% from its 2020 high. 

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Today, investors can lend to the US government for a guaranteed 2.3% real return. They will earn 2.3% plus inflation, whatever that might be, every year, for the full term, if held to maturity. This becomes a challenging hurdle for every other risk asset in portfolios to measure up against. A certain return in an uncertain world – a valid long-term case for owning inflation-linked bonds.

But that is the worst-case scenario. A short-term, cyclical rationale extends to both inflation-linked and conventional bonds. And it is arguably a more compelling case altogether.
Our base case is the economy and markets are too leveraged and too financialised to cope with 5% nominal rates and real rates over 2% for an extended period. 

In this scenario, the global economy enters a recession or market crisis in which some combination of rate cuts and a flight to safe havens pushes bond yields down, lifting the capital values mechanically. A 2% fall in interest rates could generate a total return of more than 20% for 10 year bonds. Investors can sell these bonds and rotate into bombed out risk assets – thus setting up their expected returns for the next period. 

A less well known, and even less well understood feature of bonds, is convexity. Convexity in practice means that from current yields, the price benefit from rates falling is significantly greater than the pain from rates rising. Heads you win, tails you don’t lose as much. 

Lastly, from a portfolio perspective, how long can equities continue to ignore rising rates? 

The rise in yields may have sown the seeds of its own destruction – the long and variable lags of monetary policy are still taking effect. Signs are increasingly visible that high interest rates are causing damage in financial markets (struggling small caps and banks, private equity and venture capital drying up) and now also in the real economy (higher corporate delinquencies, falling job openings and sky high mortgage rates). Any path involving yet higher bond yields most likely involves pain for markets in areas we have protection. 

It's a very, very mad world
October 2023: Some extraordinary dynamics have emerged in markets in 2023. None more startling than the breakdown of the typical relationship between bond yields and equity valuations – especially mega-cap tech stocks. So far, it’s been bond investors who have endured the pain of rising real yields. But is an equity market repricing – reflective of stickier inflation and ‘higher for longer’ rates – the shoe that’s yet to drop?
Read
A starter for yen
September 2023: The Bank of Japan has been marching to a different beat to other central banks. While the Federal Reserve, ECB and Bank of England hurried to ramp up rates in a battle against inflation, a deflationary mist lingered over Japan. Until now…
Read

Chart source: Ruffer calculations 

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. This article does not take account of any potential investor’s investment objectives, particular needs or financial situation. This article reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. This financial promotion is issued by Ruffer LLP which is authorised and regulated by the Financial Conduct Authority in the UK and is registered as an investment adviser with the US Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. © Ruffer LLP 2023. Registered in England with partnership No OC305288. 80 Victoria Street, London SW1E 5JL. For US institutional investors: securities offered through Ruffer LLC, Member FINRA. Ruffer LLC is doing business as Ruffer North America LLC in New York. Read the full disclaimer.

Investment Review
April 2024: Jonathan Ruffer discusses the stock market’s seemingly invincible summer. This has created distortions in both debt and equity markets, and with them, opportunities to benefit from a change in the season.
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Something new under the sun
Several new features of the global financial system have increased both the risk of a market crisis and its likely severity.
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Out of sight, out of mind
April 2024: Markets today are very different to the pre-2008 era. But has systemic risk been removed or relocated?
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London
Ruffer LLP
80 Victoria Street
London SW1E 5JL
Paris
Ruffer S.A.
103 boulevard Haussmann
75008 Paris, France
New York
Ruffer LLC
300 Park Avenue
New York NY 10022
Edinburgh
Ruffer LLP
31 Charlotte Square
Edinburgh EH2 4ET