Long bond – cognitive dissonance
I had an opportunity to meet with a group of investors last week. The discussion revolved around the present market conditions and the likely direction of equity and bond markets over the next few months. The views about the equity markets were divergent. However, the views about the bond markets were surprisingly similar. A substantial number of people believed that the interest rates have peaked and may move lower in the next 6 months. Long bonds thus appeared as a consensus trade. Almost all of them have been advised by their respective advisors (or friends) to increase the “duration” of their debt portfolio to avail maximum benefit of the declining interest rates. A deeper inquisition highlighted several interesting issues related to the “long duration” positioning of the investors. I want to share some of these issues with the readers to seek their views in this regard. · Most of the investors were not fully conversant with the...