Bonds RouteMap: Fair Value Line

Profit from divergences between actual prices and fair value

Sample of our summary chart. The red up + down arrows show the track record of our technical algorithm. The orange projection shows our year on year ecomometric forecasts.

This strategy is intended to show the index level that can be explained by economic factors based on past relationships over very many years. Divergence between actual levels and predicted levels show the extent of over- or under-valuation based on investor euphoria or fear prevalent at any point in time.
 
The bond market index is shown as the thick white line on the right hand axis. The explanatory variable uses the left hand axis. Fair Value is the yellow line. Best Guesses for the next couple of years are shown as extensions in orange into the future. These Best Guesses suggest what would happen to Fair Value, based on Consensus Forecasts for inflation and economic growth.
 
For comparability, bond market indices have been rebased to set year-end 1994 at 100. Please note the differences between these Summary charts and those for other RouteMaps. Since income is a major consideration for investment in bonds, bond market indices are shown as total return and not in terms of price only.
 
Owing to the conversion of legacy currencies into Euros, analysis is provided on a common bond market denominated in Euros, rather than for individual countries. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.
 
Fair Value based on inflation has been of limited value because bond investors were slow to respond to changes in inflation during the Seventies and Eighties and because of the flight to safety during the 2008 financial crisis.  (See Rate of Inflation) Nevertheless our charting technique has been modestly successful throughout.