Valuation is always conditional. Most valuation techniques rely on some implicit belief in mean reversion, but this is only relevant if you think that history always bears some resemblance to the future. In the case of government bond yields, it has been extremely dangerous to bet on mean reversion over the last 30 years. Anyone who has argued that since the financial crisis bonds are expensive based on past average yields has been made to look foolish because the period has marked a transition from one regime to another.
Analysing the Bank of England’s announcement last month is only of use insofar as it can tell us anything about whether we are about to enter another transitional phase.
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Eric Lonergan, macro fund manager, M&G Investments
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