Investors’ final word

Markets often produce counterintuitive results. We have seen greater volatility in British monetary policy, higher British inflation and a currency seemingly dependent on higher interest rates relative to both the USD and EUR for stability. Sounds like a good place to avoid, does it not? No. If we take the total return for American, British, and Euro 10-year notes translated back to USD since January 1999, we find the British bonds have the highest total return. The reinvestment at the higher short-term rates — note in the UK base lending rate remains the highest of the three central bank rates — accounts for this paradox. Which bond had the lowest total return? That would be the American 10 year T-note; the low short-term interest rates of 2001-2005 lowered the reinvestment component.

This greater currency-adjusted return for the British bonds has to be some sort of odd revenge of the Law of Unintended Consequences — a law that repeats itself throughout market history. We can learn all about human foibles from this, but anyone willing to bet an understanding of the self-defeating nature of economic policy will cause decision-makers to cease, desist, and abandon their hubris is likely to lose a lot of money in a short period of time.