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3rd Quarter 2019 CIO Commentary

New Thinking

This quarter we’ll first share our view of what’s going on in global bond markets and then we’ll discuss how investors’ ESG thinking and approach is evolving. As we write this note, approximately $15 trillion of debt globally yields less than zero. Simplistically, that means an investor pays more for a bond than she will receive in total interest payments and principal repayment. The bondholder pays an annual premium to lend money to a borrower with the hope that the borrower will remain solvent and pay her back. She locks in a guaranteed loss the instant she purchases the negative-yielding debt if she holds to maturity. The investment commentator Louis Gave of Gavekal Research recently called this highly unusual situation “the greatest bubble any living investor has ever witnessed, dwarfing in its capital misallocation both the tech bubble of the late 1990s and the mortgage bubble of the mid-2000s.” For virtually all of recorded history, investors have demanded a positive return in order to take the risk that a creditor may default and not pay them back. If negative bond yields become a lasting part of the investment landscape, achieving a 5% real return will become much more difficult. Conversely, if you are looking at borrowing money (or refinancing), now could be an excellent time to do so. Let’s look at this vexing issue from different vantage points to determine what’s changed and whether it can last.

This is an excerpt from a longer article. Please download the PDF to read more.
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