Roberts said current central bank policies, particularly in the US and the eurozone, are liable to stoke inflation to problem levels at a time when core government bonds are trading at “completely irrational” valuations.
“Rates markets tell us all is broken,” Roberts said. “But the fact is the state of the world isn’t as bad as it is currently made out to be. In fact, I’d rather see US Federal Reserve chair Janet Yellen raise rates and push the dollar up a little. However, in the same way the Fed had an opportunity to start raising rates in 2014 but failed to do so, I think we will be disappointed again; central banks won’t take the plunge.”
Roberts noted that US GDP grew 1.4% in the fourth quarter of 2015, faster than the previously estimated 1%, while core inflation hit 2.3%, with headline inflation at 1.0%.
In the medium term, Roberts said no further Fed action and more ECB quantitative easing are “sub-optimal”, although he said they will support risk assets a while longer, at a price.
Roberts said he may pare duration in the Kames Strategic Bond fund he manages “to the bone” if some G7 yields move further into negative territory.
“I very much dislike G7 bond markets, especially core European and UK sovereign markets, at current value levels,” he said. “However, my experience over the past two years has taught me that fighting European Central Bank President Mario Draghi and the madness of negative yields is more often than not a battle I will lose.”
Roberts oversees more than £32bn of fixed income assets at Kames.
