Personal Finance: A panicky flight to safety
Saturday 10 October 1998
The one thing on which everyone in the market seems to agree is that what we need now is concerted interest rate cuts to head off the threat of worldwide deflation. That is what we are getting, but far from celebrating the news, the markets are already clamouring for more medicine even before they have had time to digest the first instalment.
Even those of us who have had many years to learn that nothing in the City is ever done by halves can still be confounded by the speed and intensity with which normally sensible financial institutions start twitching uncontrollably at the first sign that their world may be facing potential difficulties.
My view is that, while the City is usually right about the next direction the markets will take, its reactions are often ludicrously exaggerated.
As Alan Greenspan, the Chairman of the Federal Reserve, observed this week, there is something highly unusual about the excitable and often conflicting messages which are being signalled by current valuations in the markets. "I've never seen anything like it" is how Greenspan summed up his response to questions about the recent dramatic flight by investors into government bonds. In just two months, funk money has sent the price of US and UK government bonds soaring.
The US long bond yield - the rate at which you can lend money to the US Government for 30 years - has now settled firmly below 5 per cent. This is not much more than the yield at which you can buy an index-linked US Government security (which looks an infinitely better bet). The equivalent UK gilt is now yielding a remarkable 4.4 per cent, which is the lowest rate I can remember for a government bond of that ilk.
Although I have long urged the case for buying gilts, the current surge in gilt prices now has all the signs of another classic asset price bubble in the making. It represents a flight to quality on credit grounds, as governments like ours don't usually default.
But buying a long term government bond on a yield of little more than 4 per cent, when inflation is still at 3 per cent (albeit falling) cannot by any stretch of the imagination be described as a flight to safety.
Another measure of the extreme changes which the current crisis are making to valuation levels is evident when you look at the relationship between bond and equity yields, which have also entered new territory. With the stock market now yielding 3.5 per cent, the gap between equity and gilt yields, a traditional benchmark of relative value, has narrowed dramatically.
Indeed, as the FT pointed out this week, the yield on one sector of the market, smaller company shares, is actually now above the yield on gilts - for the first time in at least 30 years.
The figures in my chart show how the respective yields on gilts and equities have moved over the past 15 years. The trend for both is firmly downwards, as you would expect in a world of real and enduring falls in inflation. The ratio between the two yields has now fallen from its typical range of around 2 times to less than 1.4 times.
What the figures are saying is that either shares are seriously undervalued at current levels, or that gilts are substantially overvalued. They cannot both be right. It is a money making opportunity if you can decide which one it is.
The way that the dollar has suddenly reversed direction this week also seems to be another important thing to watch. If you care to think of Mr Greenspan as the pilot of the world economy, what he is trying to tell us is that the readings on the instrument panel in his cockpit have suddenly all gone haywire. How real the danger is remains to be seen. Whatever the outcome, it's still hard to believe that lending money to the government at 4.25 per cent for 30 years is anything but one more case of hope triumphing over experience.
Having boasted a couple of weeks ago about the value of on-line information for investors, I must now confess to giving you the wrong web site address of Interactive Investor. It is: http://www.iii.co.uk - my apologies
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Mark Dampier: An infrastructure fund that builds returns by taking different roads
Simon Read: Timeshare owners accuse Macdonald Resorts of land grab
Five Questions: Changes to car tax discs
Donald MacInnes: Let's pretend Scotland won and now a salmon is running the country
Bargain Hunter: Win a new iPhone 6
- 1 Mario Balotelli: Staff at arson-hit Manchester Dogs' Home convinced Liverpool striker is behind five-figure donation
- 2 Friends 20th anniversary: Alison Jackson photographs reunited cast
- 3 Friends 20th anniversary: The highs and lows of the cast's careers since 2004
- 4 The response to my Pizza Express review has been overwhelming, and taught me a lot about journalism
- 5 Free U2 album: How the most generous giveaway in music history turned into a PR disaster
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Scottish independence: The Queen breaks silence on referendum debate – as think tank warns of £14bn black hole if Scotland votes Yes
iJobs Money & Business
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...
Day In a Page
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize