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A Tipping Point for Bonds and Crypto?

16 November 2023

 

Just a few weeks ago, former European Central Bank president Mario Draghi warned that the EU would fall into recession by the end of this year. “It’s almost sure we’re going to have a recession by year end [in Europe]… It’s quite clear that the first two quarters of next year will show that,” he told a conference hosted by the Financial Times newspaper.

At the same time, the UK was reported to already probably be in a recession after soaring interest rates and rising unemployment turned households more cautious about spending, according to analysis by Bloomberg Economics.

I highlight this because bad news for the economy is often good for parts of financial markets. Indeed, the first week of November was notable for rallies in bond markets and crypto assets, triggered by speculation that central banks were finally defeating stubbornly high inflation, paving the way for them to cut interest rates.

Nervous that markets were getting ahead of themselves, Bank of England governor Andrew Bailey weighed in with cautionary words, saying it was “much too early to be thinking about rate cuts.” Even so, perceptions are changing and traders are thinking ahead to when rates will be cut from their current high levels.

Why does this matter? Because for bond markets and cryptocurrencies, a turning point for interest rates would be likely to spark a long lasting rally in prices.

Changing sentiment can already be seen. For instance, the VanEck iBoxx EUR Corporates UCITS ETF that tracks the largest and most liquid euro-denominated corporate bonds, rose by around 1.8% between 19th October and 7th November (the day before I wrote this column).

Over the same few days, the VanEck Crypto and Blockchain Innovators UCITS ETF climbed almost 15%1.

Source: Bloomberg, total returns in EUR. Past performance is not a guarantee of future returns.

That tells a tale of two risk profiles. The bond ETF is considered to be relatively low risk, only giving exposure to corporate bonds with an investment-grade rating. As interest rates fall, bonds’ yields fall as well, and as the yields go down the prices go up. However, other associated risks, like credit risk, must be considered before investing.

The higher a bond's credit rating, the more sensitive it generally is to changes in interest rates. This interest rate sensitivity is measured by duration which is the weighted average time it takes for the price of a bond to be recovered with the cash flows that the bond generates. Companies with a higher credit rating generally have lower yields. This means it takes longer to earn back the price of the bond and hence a higher credit rating means a higher duration. A bond with a higher credit rating is therefore more sensitive to interest rate changes than a bond with a lower credit rating.

On the other hand, if the interest rates are too high, high-yield issuers might find it harder to finance their business activities thus making it harder to make timely coupon payments on their bonds. If the rates fall, they would be able to borrow at lower cost, thereby lowering their interest burden. For that reason, the VanEck Global Fallen Angel UCITS ETF – focusing on previously investment grade bonds that have recently been downgraded to high yield status – currently sitting at 8% yield, might also prove sensitive to rate movements.

Of course, crypto currencies are well known for their volatility and their prices lit up at the first whisper of a turning point for interest rates. We have seen in the past that decreasing rates create more room for investing in crypto currencies. But there’s something else happening here, as speculation mounts that the US regulator, the Securities & Exchange Commission, might soon approve bitcoin ETFs. When combined with the EU’s new MiCA crypto regulation that’s due to come into effect in 2024, there’s considerable excitement that cryptocurrencies are finally moving into the mainstream.

Of course, there can be no certainty that interest rates in the EU, UK or US will definitely fall in 2024. It’s true that core inflation is coming down but plenty of people remember the harsh lessons of the 1970s and 1980s when it suddenly rose again. If you do believe that high inflation is beaten, though, you could consider an investment in bonds, perhaps backed by a little exposure to cryptocurrencies.

1 Past performance is not guarantee of future results.

IMPORTANT INFORMATION

This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

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The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

VanEck Asset Management B.V., the management company of VanEck Global Fallen Angel High Yield Bond UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck Asset Management B.V. transferred the investment management for the ETF to Van Eck Associates Corporation, an investment company regulated by the U.S. Securities and Exchange Commission (SEC). The ETF is registered with the Central Bank of Ireland, passively managed and tracks a bond index.

VanEck Asset Management B.V., the management company of VanEck Crypto and Blockchain Innovators UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index.

VanEck Asset Management B.V., the management company of VanEck iBoxx EUR Corporates UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks a bond index.

The value of the ETF assets may fluctuate heavily as a result of the investment strategy. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets. Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:

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Performance quoted represents past performance. Current performance may be lower or higher than average annual returns shown. Discrete performance shows 12-month performance to the most recent quarter-end for each of the last 10 years where available. E.g. '1st year' shows the most recent of these 12-month periods and '2nd year' shows the previous 12 months period and so on.

The Dutch domiciled ETFs use a gross reinvestment index as opposed to many other ETFs and investment funds that use a net reinvestment index. Comparing with a gross reinvestment index is the purest form since it considers that Dutch investors can reclaim the dividend tax withheld. Please note that the performance includes income distributions gross of Dutch withholding tax because Dutch investors receive a refund of the 15% Dutch withholding tax levied. Different investor types and investors from other jurisdictions may not be able to achieve the same level of performance due to their tax status and local tax rules. Returns may increase or decrease as a result of currency fluctuations.

All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

© VanEck

Important Disclosure

This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

© VanEck (Europe) GmbH / VanEck Asset Management B.V.