June 19 marked the 10-year anniversary of the start of the financial crisis in the U.S. One week later on June 27, as Italy finalized the recapitalization of Banca Monte dei Paschi di Siena SpA, global bond yields began to rise in a synchronized fashion by 25–50 basis points (see chart). Despite inflation levels that remained below stated targets, central banks committed themselves to pressing ahead with an exit from the emergency monetary policies of the crisis period. A milestone in the crisis may have been reached. We had been waiting for European bank recapitalizations since 2009!
A lot has changed since we positioned our various portfolios for the reflation trade back in the summer and fall of 2016. The initial euphoria around the new administration in the US has faded, continental Europe has rejected the populism that rocked the Anglo-Saxon world, and emerging market assets have seen a noticeable recovery.
When we launched the Signature High Income Fund in 1996, the Signature team pounded the table with that simple premise. As interest rates fell starting in the early 1980s, yields in traditional parts of the bond market were, and continue to be, insufficient to generate an acceptable level of income. Nonetheless, government bond yields kept falling, generating capital gains in a defensive asset class, thereby perpetuating the illusion that bonds equal income.