Bank Bonds have done better, even as investors shift to Real Estate
February 5, 2021
Fixed Income Investors move from Banks to Real Estate
In hindsight, bond trading during 2020 had all the elements of a Bollywood movie, with a pretty formulaic story line. It began with the villainous market beating up the protagonist (a.k.a. investors), followed by some melodrama and eventually a happy ending with a twist.
The chart above shows the cumulative buy/sell volumes of Bonds by Industry Group. As you can see there is a clear pattern for Real Estate and Banks, while the other sectors were quite static.
The chart below shows the average YTMs on which these transactions were done (and is on the same time scale as the chart above). Real Estate transaction YTMs were on average 3.29% higher than that for Bonds
Fight Scene followed by some Melodrama
As you can see from the two charts above, until Jun 2020 investors were selling bonds even though yields were rising. Since a 1% yield rise is about a 2.5%-3.0% price fall (as a rule of thumb), this means bond prices fell as much as 10% during this period. Booking of losses is always very painful (a.k.a. the Bollywood fight scene)
We then saw some melodrama during July-August when Real Estate investors decided to diverge from the Banks investors. They kept buying while the Banks investors started selling again (a.k.a. two brothers going their separate ways scene)
Happy Ending with a twist
Towards the end of the year we saw nicely rising prices and falling yields. Real Estate bond buying has taken a new vigor since the new year. Even though this new buying is on higher yields, this time it means that investors are buying fresh bonds at higher credit spreads (a.k.a. the happy ending)
Overall investors ended the year in positive territory, but of course the returns since Jun 2020 have been much better. The twist in the story is that even though the audience expected Real Estate bonds to do better (given higher YTMs and increased buying) the real winner are the Banks bonds. As of the moment investor returns on Banks are running significantly higher than on Real Estate (see chart below). This could change in the coming months if markets stay stable and the higher coupons from the Real Estate bonds start trickling in.
Conclusion (tl;dr)
- Real Estate and Banks bonds saw heavy selling during the first half of the year
- The sentiment turned in early June 2020
- Since then the Real Estate Bonds have been largely bought back, but Bank bonds are still being sold
- Real Estate bonds have made an average absolute return of 5.23% since June 2020
- Banks bonds average returns since June 2020 are higher at 8.74%
Please note that this newsletter is just a data analysis of actual investor behavior and does not constitute investment advice in any form.
