Our model portfolio overweight position in EU bonds has worked well this year but the time has come to bank some profits and shorten the duration of the bonds we hold. The end of this multi-decade bull market in bonds is finally coming into view. German 10 year yields have reached 0.89%, while Dutch 10-year yields are trading at 500 year lows. There simply is little room left for yields to fall and therefore limited upside for bond prices. As a result, we are making the first change to our model portfolio in quite some time, introducing a 30% allocation to absolute return bonds. To fund this position, we are reducing our existing bond allocation by 20% and also investing 10% from cash. The model portfolio is now invested 20% equities / 30% 5+ year Eurozone government bonds / 30% absolute return bonds. / 20% gold.
German 10 year yields broke below 1% in August for the first time in decades. In the last couple of weeks, yields have started to move higher, particularly in the US, where the Federal Reserve has backed off sharply on their money printing / QE strategy. The Fed has been printing money and buying bonds for years, driving yields sharply lower in the process. Now that QE is ending (for the time being), bond yields have started to rally.
We should expect a similar though less dramatic rise in yields in the Euro zone in the months ahead as global bond markets normalize and government bond yields start to adjust to reflect improved economic growth conditions and the potential threat of rising inflation in future.