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A key measure of risk-reward in financial markets has done something not seen since the financial crisis.
Sharpe ratios, which track the return of an asset compared to their level of risk, favour US bonds for the first time in a decade.
“For those James Bond fans among you, bonds are back,” John Bilton, JPMorgan Asset Management’s head of global multi-asset strategy, said this week.
Generally speaking, stocks return more per unit of risk than bonds, but that is no longer the case.

A tool used by financial market investors to evaluate the return of an asset compared to their level of risk has flipped “conclusively” in favour of bonds for the first time since the financial crisis.

That shift presents portfolio managers with a unique opportunity, according to senior staff at the $1.7 trillion asset management arm of JPMorgan.

Generally speaking, stocks return more per unit of risk than bonds, but in recent months that dynamic has reversed, strategists John Bilton and Karen Ward told journalists at the launch of the firm’s annual Long-Term Capital Market Assumptions guide this week.

“For those James Bond fans among you, bonds are back,” Bilton, head of global multi-asset strategy, said at the event, held in the firm’s London office.

He continued: “It may not be the case here in the UK, or indeed across the eurozone, but if we look at the US, what we’re actually seeing is that the Sharpe ratio for US Treasuries — the amount of return one earns for a unit of risk — now sits above that of US large cap equities.”

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The Sharpe ratio, developed by the economist William Sharpe in the 1960s, is designed to help investors identify assets with the best risk-adjusted returns. It is generally used when discussing returns in the stock market, but can also be used when looking at fixed income markets.

An inversion of the Sharpe ratio to favour bonds has not been seen since the 2007-2009 crash, when stock market returns were crushed by the crisis, Ward and Bilton pointed out.

“The risk adjusted return for bonds is now higher than equities, and that’s the first time we’ve been able to say that conclusively since the financial crisis,” they said.

The phenomenon is only visible in the USA, they noted, pointing to the Fed’s tightening cycle as the …read more

Source:: Business Insider

      

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A closely watched measure of market risk has reversed course for the first time since the financial crisis — and it’s created a massive opportunity for investors

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