Four handles? Fork handles? Four candles?

In all financial and commodity markets the big figure (the first part of the price) is referred to as the handle. This allows verbally quicker and more accurate trading (see this classic Two Ronnies sketch) as the handle does not need to be mentioned in every transaction. In the bond markets the handle from a yield perspective is the first big figure, so when the yield on a security is 4.5%, the handle would be 4. The ongoing bull market in the UK means there are currently no conventional gilts outstanding with a yield greater than, and therefore with a handle of, 4.

Like the stock market’s focus on the Dow 10,000 level, bond investors also focus on significant round number levels.  The psychology of hitting new lows in yields takes time for the market to get its head round, while the financial implications for issuers and investors can be enormous. The loss of the 4 handle in long dated conventional UK bonds has been replicated by the loss of the 4 , 3, and 2 handles of long dated US, German, and Japanese government bonds respectively over the last three months.

The implications of these new low yields is substantial.  For an investor such as a pension fund that is short longer dated liabilities, the funding gap increases, putting it under pressure to buy more bonds at a lower yield and higher price due to the mismatch of assets and liabilities. While for issuers like the government it means they are better able to service their debt, and will need to issue less to meet their funding needs. Thus the psychology of the shift below 4 percent is compounded in favour of bulls versus bears by the realities of market positioning.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Richard Woolnough

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