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The global bond market is much larger than the stock market. Global bond issuance totals roughly $300trn, while global stock markets are worth maybe $100trn. Also, bond investors — buyers of fixed-income securities — tend to be more conservative and risk-averse than share buyers.
Therefore, it’s said that while shareholders worry about the return on their investment, bondholders worry about the return of their money. And, ripples in the bond market can warn of waves swamping the stock market later.
Bond investors get nervous
When politicians make troublesome financial decisions, bond investors often scramble for the exits. These selling waves put huge pressure on governments to reverse problematic policies. Thus, bond-market disruptions can convince politicians to avoid making decisions likely to increase inflation and threaten bond returns.
This led to the description — by economist Ed Yardeni in the 1980s — of investors who sell fixed-income securities in protest against poor policies as ‘bond vigilantes’. In recent decades, it seems bond vigilantes increasingly call the shots.
When British ex-prime minister Liz Truss unveiled huge tax cuts in a mini-Budget in September 2022, UK Gilts (government bonds) fell the most in almost two centuries. This forced Truss to resign after 45 days in power, while also rattling the UK stock market.
Likewise, when President Trump unveiled huge US import tariffs on 2 April, US Treasury yields soared and share prices plunged. Within a week, bond ructions caused Trump to suspend new tariffs for 90 days. Afterwards, Trump described bond markets as ‘yippy’ (nervous).
‘Sell America’
Shareholders panicked during April’s bond scare and stock-market plunge, but the S&P 500 has since recovered to within 3.8% of its record high.
However, Wednesday, 21 May saw soft demand during a 20-year Treasury auction, with global investors perhaps growing wary of owning US assets. The S&P 500 immediately dived 1.6% after this latest bond wobble.
Yearly Treasury issuance was $4.5bn in 2007 and $30bn this year, with the ratio of US debt to GDP soaring from 35% to almost 100% over this period. This year, the US will pay a record $1trn in debt interest. And with tax cuts coming, the US budget deficit will rise from this year’s estimate of 6.4%. All bad news for bonds — and shares?
A stock for all seasons?
Clearly, share owners are paying closer attention to recent weakness in bond markets. Also, given higher market volatility, some investors are cutting back on US assets. But billionaire Warren Buffett — the world’s greatest investor — once warned to “never bet against America”. And I see shares in Buffett’s highly diversified, $1.1trn conglomerate Berkshire Hathaway (NYSE: BRK.B) as well-placed to ride out coming storms.
As well as a massive stock portfolio packed with blue-chip firms, Berkshire generates huge cash flow from its powerful insurance operations. It also owns over 180 different companies, in sectors including consumer goods, energy, manufacturing, and railroads. This makes the group incredibly widespread across the US economy.
Even better, Berkshire has $347bn in cash. Therefore, if stock markets crash, then the company can buy quality assets at discounted prices. Of course, in sustained market meltdowns, few firms would emerge unscathed — plus Buffett himself is retiring this year.
My family portfolio has owned Berkshire shares since November 2022 for the long term. Indeed, if prices slump, we may well buy more!
