As you probably know, this striking performance owes much to a single company – Novo Nordisk, a pharmaceutical heavyweight built on diabetes medication and, in later years, smashing success with weight loss medication. In January alone, the stock rose by almost 11%. We have Novo Nordisk in two of our portfolios, so I’m not entirely impartial in choosing to highlight this particular stock. Given its importance for the index and indeed the entire Danish economy, however, I think it merits a few words.
The very worst index in my spreadsheets in January was the S&P U.S. Treasury Bond 10+ Year Index, which fell by 2.2%. This index contains US government bonds with a remaining maturity of at least 10 years. The decline is easily explained by the resurgence of long interest rates, which rose in January after falling sharply in November and December. The rise was quite modest, only 7 basis points for the 10-year Treasury yield, but a longer average maturity exacerbated the impact on this index.
The issue here is interest-rate risk. Despite a growing mountain of US government debt and several rating downgrades, there is very little credit risk in US Treasuries, or so the market says. Price movements in long-term US debt reflect changes in interest rates, that’s all.
Just don’t trivialise interest-rate risk. For the past three years, the S&P U.S. Treasury Bond 10+ Year Index has an annualised volatility of 17.2%. That’s close to the S&P 500 (just below 17.5%) and notably higher than the MSCI World Index (14.5%). In other words, interest-rate risk has provided volatility on par with or exceeding equity risk.
And if you belong to the “risk is more than volatility” club, you may note that the index is down 37% from its peak in August 2020. It could have been worse: In October, it was down 46%. Fixed coupons and long duration may be a very expensive combination.
According to Wikipedia, “United States Treasury bonds are often assumed to be risk-free bonds.” I’m afraid that this assumption, focusing only on credit risk, is shared by many investors and independent advisors. During the past three years, large losses have been suffered in long-dated US Treasuries. Those losses grew in January.
Meanwhile, our portfolios of predominantly floating-rate notes had yet another good month.
Finn Øystein Bergh
Chief Economist & Strategist
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