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Our views 13 December 2021

JP’s Journal: Real tennis and frustration

5 min read

I was up early on Saturday morning to play real tennis – I game I really love. For those not familiar it is a strange mixture of lawn tennis and squash, played on an indoor court with a kink in one of the walls. Although similar to lawn tennis’s point scoring system, players only serve from one end of the court and points are not automatically lost if you can’t return the ball from the serving end.

After the game (which I lost) I thought about some of the similarities between sport and investing. My tennis strategy is to play on my strengths and exploit the weaknesses of my opponent – not revolutionary but sometimes difficult to execute. In the heat of battle there is a temptation to revert to tactics which can be counterproductive. In real tennis this means hitting the ball too hard and letting adrenalin take over. Frustration can build and you start making irrational decisions. You need to regain composure, concentrate on exploiting weaknesses in your opponent’s game and try to get them frustrated.

In the investment world frustrations often surface when markets are not going your way. You think you are right, but markets are saying something else. From my perspective, UK government bond markets fall into this category. Yields are too low at the long end – but have gone even lower in recent months. Does it make sense that the UK government can borrow for 50 years at a yield of 0.6%? Or that investors are prepared to accept a negative 2.5% real return on index linked gilts?

But what do you do about it? You can throw in the towel and say that you must be wrong. You can increase the size of your position and hope markets move in your favour. Or you can put your frustrations on one side and recalibrate your actions.

It is clear to me that the Bank of England’s (BoE) quantitative easing programme should have ceased by now. But, for whatever reason, it is continuing. This is an important factor in keeping long yields where they are. When it stops – as it will do next year with no more reinvestment when official rates hit 0.5% – markets will have to stand on their own. Our strategy in gilts is to stay in the game and wait for this change. It will happen, and as active investors we want to exploit the opportunity when it does. It is the same message as in real tennis: have a strategy, adapt your tactics, and keep frustrations in check.

Government bonds and cash

The most eye-catching data point last week was US inflation which hit 6.8%. Although in line with consensus, it will cause policy makers to ponder their ultra-loose monetary policy. Conversely, there is little that tapering and higher rates can do about energy inflation of 33%. Looking for a silver lining, it is unlikely that used car prices can sustain their rate of advance and energy costs could go into reverse on weaker economic activity stemming from higher Covid infections.

In the UK, economic ouput for October was a bit shy of estimates at 0.1%. This leaves Q4 on track for slower growth than Q3, particularly assuming a hit to activity in December from tighter social distancing rules. Services output has now reached pre-pandemic levels, but consumer-facing services are still 5.2% below pre-pandemic levels. A weak spot was construction, where output fell 1.8% due to shortages in some products including steel and concrete.

Yields on 10-year gilts were broadly unchanged over the week at 0.75%, despite a global trend of slightly higher yields. In the US, 10-year rates increased towards 1.5% and 20-year yields hit 1.9%. Real yields reflected these moves although ultra-long dated UK index linked gilts still look expensive at below -2.5%. The US Consumer Price Index data pushed implied inflation higher but still below the levels seen several weeks ago; in the UK we saw long end implied inflation weaken a bit.


The most noticeable feature last week was how well risk assets performed in the face of deteriorating news flow on Covid. High yield spreads fell about 25 bps whilst investment grade sterling bonds eked a small gain.

Investment grade markets are heading into their Christmas and New Year lull and there was little new issuance activity; performance remains relatively strong in most strategies. It’s a similar performance message in our high yield strategies although market activity remains more elevated.

For those interested in real tennis, have a look on the internet to see examples. It’s a great game and, like most sports, has important messages for many aspects of day-to-day life, including investments. I will hopefully win my next game.


Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.