Everybody knows that bonds are loaded, everybody buys with their fingers crossed…
Watertight yield spreads have driven flocks of income seekers either towards the short end of investment grade or into high yield, equity income and alternatives.
At the same time, impending interest rate hikes either side of the Atlantic are fanning the flames of negative sentiment initially sparked by stratospheric prices and spread by liquidity concerns.
The outlook is bleak…or is it?
“Too many people have called the top on bonds during the past four years,” said Mark Dampier, head of research at Hargreaves Lansdown.
“There is no real pressure on interest rates to go up at the moment, and therefore no reason for bonds to fall. We are probably only halfway through the recovery, and most of the bond players have been caught short and gone into absolute return too early.”
That said, looking across bond markets there does not seem to be much yield outside of high yield and EMD – spaces that are either good value or fraught with danger, depending on who you ask.
But according to Bryn Jones, manager of the Rathbones Strategic Bond Fund, even if rates do go up in the short-term, fears over negative investment grade returns are sorely misplaced.
He said: “If you have a long-term investment horizon and rates do not go up too aggressively you can still get decent returns, and you do not get the same volatility [as equities].”
Another space that – somewhat unsurprisingly – is currently down and out in terms of investor favour is developed market government debt, a space which underwent a shaky period earlier in the year.
UK gilts are a prime example of this seeming lack of value, but while Kevin Doran, Brown Shipley CIO, currently has zero exposure to the gilt market, he is biding his time before an opening emerges.
