bond returns of 2012 will not be repeated

Fixed income proved to be popular during 2012 as investors continued their flight to safety and stayed reluctant to move back to equities en masse.

bond returns of 2012 will not be repeated

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However, with many bond markets seeing yields at depressed levels, it is unlikely that investors will benefit from the same high level of returns in 2013.

Despite this, fund managers are adamant that opportunities in fixed income will be found over the coming 12 months.

Bob Jolly, head of global macro at Schroders

“With yields on developed market bonds still at depressed levels and credit spreads considerably lower than last year, it’s clear that a passive approach towards global bond market beta is unlikely to make you rich this year. There cannot be a repeat in 2013 of the bond market returns of 2012.

“But it will be another year where markets will swing between euphoria – when either growth or politicians offer positive surprises – and misery – when either the political system takes its collective foot off the reform agenda or we see a temporary ebbing in economic momentum.”

Rod Davidson, head of fixed income at Alliance Trust Investments

“Flexible and active bond strategies should be the area of choice for the foreseeable future and credit can still produce interesting returns in a recovering economic environment. Even though there is much talk about the relative attractiveness of equity dividends, bond funds will continue to be a key source of income for investors.”

David Coombs, head of multi-asset investments at Rathbone Unit Trust Management

“Gilts have little intrinsic value these days, but they can offer protection against falling equity markets. Furthermore, low nominal spreads look very vulnerable. We favour exposure to gilts in the long duration space, which tend to have a lower correlation to equities, and thus provide us with a good diversifier. 

“Current spread levels do not provide a buffer from any inflation surprises, especially if governments decide to cancel debt – something which we believe there is a high possibility next year – or if issues persist in the Middle East. We would therefore look to buy into index-linked gilts.”

John Pattullo, head of retail fixed income at Henderson Global Investors 

“Our strategy of favouring ‘double core’ bonds – bonds from core companies in core countries – is likely to remain unchanged in 2013. 

“We expect more peripheral eurozone volatility. It is difficult to believe that there will not be further restructuring in the periphery. This is predicated on the paucity of growth in Europe, which makes it challenging to delever.

“In contrast, the US appears to be displaying more credit growth and this may help the US economy surprise on the upside. With the eurozone periphery, policy announcements and politics likely to be sources of occasional market volatility, we continue to believe that derivatives offer an additional and highly liquid investment tool with which to play shifts in market sentiment or to express views on individual credits.”

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