By Tom Bradley

Last week, the yields on Spanish 10-year bonds hit 2.82%. According to the Financial Times, this was the lowest since the early 1990’s. This week, the yield dropped further to 2.64% after the ECB reduced the bank deposit rate to -0.1%.

Also last week, an auction of 10-year Italian bonds came at a yield of 3.01%, which was the lowest since the introduction of the Euro (1999). They too are lower this week (2.75%). As a point of reference, the yield on 10-year U.S. Treasury bonds is 2.60%.

Clearly, sovereign bond yields are telegraphing that things are getting better in Europe and the chance of another debacle is now zero, or close to it. As well, it’s an indication that investors believe that ECB president, Mario Draghi, is going to keep his foot on the stimulation gas pedal.

Unfortunately, it also signals that the markets’ appreciation for risk has diminished. It feels like we’ve entered a phase in the cycle when the thirst for yield and return is overwhelming the fear of downside and default. As we’ve noted before, prices in the high yield arena are also indicating that risk is not a big concern.

At Steadyhand, we’re going the other way. In the Income Fund, our manager (Connor, Clark and Lunn) has eliminated the high yield bond position (8% of total assets at the beginning of the year) and has generally been high grading the corporate bonds. In the Founders Fund, we’re running with a lower-than-average allocation to bonds (currently 30%), and have recently brought the equity weighting down to 55% (below the long-term target of 60%).

As investors become more complacent about risk, bond valuations test their upper limits and bargains in the stock market get harder to find, we’re taking a cautious stance. We’re not chasing yield or return. It’s time to be patient.