The asset manager’s chief investment officer for fixed income pointed out that bonds have delivered strong returns over 2012, owing to the “windfall” capital gains that stemmed from robust demand for the asset class and ongoing quantitative easing by the world’s central banks.
But he added: “Expectations should be that returns from fixed income are lower in 2013. This is not a bursting of the bubble, but just a normalisation of returns as it becomes more difficult for spreads to narrow much further or for underlying yields to decline.”
Iggo also noted that the returns of 2013 are likely to be a function of yield rather than capital gains. This is because the price of bonds will move back towards their principal as they head towards maturity.
Despite this, an index-weighted investment grade return of between 4% and 5% could still be achieved next year. Iggo thinks higher returns can be realised from bank and insurance debt, while short-dated peripheral corporates offer attractive spreads.
Meanwhile, a return of about 8% from the high-yield debt does not seem unrealistic in 2013 while the one-year to three-year part of the Spanish and Italian government bond markets may be “interesting” if the European Central Bank starts its outright monetary transactions programme.
Iggo said the expectations of lower returns should not be used as evidence of a bond bubble that is about to burst.
“You should only worry about a bubble if you think that when it bursts you will lose a lot of your capital – think Tulips or Dot.Com or Irish house prices,” he explained. “In bonds, unless you own bonds that default, you should always get your money back.”
