Edwards, who manages the BlackRock Sterling Strategic Bond and UK Corporate Bond funds, commented that while yields have recently edged closer to fair value, political shocks and likely US-led reflation will keep investors from getting too comfortable.
At the centre of this persistent volatility in the bond markets is a much stronger US dollar.
Not only does a brawnier buck threaten the stability of emerging markets and their contributions to global trade, but it could come to back to bite the US economy, if the Federal Reserve’s monetary policy becomes too out of step with other central banks, Edwards argued.
“Ultimately, dollar strength is the binding constraint on the US economy and future rate hikes. Expectations for US monetary policy are clearly at odds with the rest of the world. This means we may see the effect of recent currency moves take hold, dampening US growth, before many of Trump’s policies are enacted.”
And Edwards said it is also unclear whether UK gilts will fall or rise.
“In the UK, resilient consumer spending is likely to give way to weaker business investment and construction in 2017. The effect of this more fragile growth outlook on gilt yields will be offset, to some extent, by higher government borrowing and higher, currency induced, headline inflation. However, the pound’s ability to depreciate further versus the Euro, a currency which continues to face huge political and economic headwinds, will likely be tested.”
To top it all off, the structural factors that drove yields lower, like demographics, weak productivity and excess savings, will remain regardless of the slackening of quantitative easing efforts in Europe and Japan.
That’s why the only thing fixed income investors can be certain of, said Edwards, is that “2017 will provide opportunities to actively manage risk in volatile markets.”
