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Time to sell bonds?

During the second quarter of 2008, annualised South African bond returns [1] came in at -21.6% in rand terms, and registered -9% in dollar terms. This means that in dollar terms, bond returns have been solidly negative over a one year and three year period as well, with returns of respectively -12.7% and -2.6% registered over these periods. However the situation has clearly turned around in the third quarter of 2008, with R157 bond yields dropping by around 160 basis points during July and August. In contrast JSE All-share index earnings yields rose by around 190 basis points — from 6% in May, to 7.9% by the end of August.

The difference between the yield-to-maturity on bonds and the earnings yield on equity (shares) is often used as an indication of the relative valuation of bonds vs. equity. As can be seen from the graph, bonds appeared to be now quite overvalued against equity. This is only the second time since 1996 that such a decisive break out of the "normal" range has occurred. This might mean that it could be time to sell bonds or buy equity. more...