Speaking at the Architas Art of multi-asset forum, JP Morgan Asset Management’s chief market strategist for the UK and Europe said it is time to stop expecting to make money on government bonds.
While many have focused on the election of Donald Trump to the White House as a catalyst for the back up in bond yields, Flanders’ rationale is predicated on a recognition of the changing focus of central banks.
“It is not just that inflation is coming back, it is not just that Donald Trump is there, it is that policy makers have a different attitude now,” she said, adding that, with this change on the part of central banks, “the main thing at the margins that was pushing yields to really extreme levels has been removed.”
That is not to say that central bank policy is not going to remain extreme, or that monetary policy is likely to be anything but very loose in the next few years, but rather that the focus has shifted from pushing yields ever lower to providing support for fiscal policy.
“It is about making fiscal policy more affordable,” she said, adding that the next big question is whether or not there is enough political appetite to make use of the offer. Of this, Flanders remains unconvinced, but points out that there has been an uptick in spending already from the ECB.
Acknowledging the impact Trump has had in helping push up the US yield curve, Flanders was also quick to add that she does not expect negative yielding bonds to disappear completely.
“There remain structural forces that are keeping rates low,” she said, “but this bet we were making that they were going to carry on going lower and lower is clearly now over.”
