By David Bakkegaard Karsbøl

Since the financial crisis, investors have become accustomed to the idea that bonds could not be expected to provide a return and that bond returns would only be delivered if, contrary to expectations, yields continued to fall.

Indeed, yields continued to fall until mid-2020, when the German 10-year bond yield bottomed out at -0.9%. After that, bonds were something to be avoided like the plague.

During the same period, inflation was extremely low - despite very loose monetary policy from central banks around the world. As fiscal policy was also loosened to the max over the corona crisis, and home equity was translated into big increases in online shopping, holiday homes and car purchases, we have now seen a sharp rise in inflation.

Bond investors have sent yields soaring to reflect the risk that central banks simply do not have inflation under control. This is a big shock because financial markets generally use the yield on safe government bonds to price other assets.

For example, the interest rate on mortgage bonds should be the same as government bonds with the same maturity, but with an additional yield to reflect the slightly more uncertain nature of mortgage bonds.

The same happens with corporate bonds, EM government bonds, real estate and equities. All these riskier assets have had a miserable first half of the year because, for example, equity investors now actually have a real alternative in the form of bonds. At the time of writing, Totalkredit's 30-year 4% mortgage bond is trading at a price of 93, which gives a yield to maturity of about 4.5%.

Well, the stock market can be expected to yield more in the long term, but it is also at a significantly higher risk (about 3 times greater fluctuations). So for the first time in many years, the very expensive stock markets until the New Year have a quite viable, liquid and relatively safe alternative.

Looking at the outlook for the economy, bonds actually look even more interesting. The price of lumber has collapsed in the US, indicating a large, expected slowdown in construction activity. The same will happen here at home, where margins for developers are under severe pressure.

In all likelihood, growth in the second and/or third quarter will be negative and employment will fall. The fact that central banks are only now starting to tighten monetary policy is also a problem. They are tightening on the way into a recession and thus making things worse. It seems likely that consumption and inflation will therefore peak in the very near future and interest rates should therefore also be close to their peak.

Bonds have therefore become interesting again.