Ben Gutteridge, who runs the model portfolio service at Invesco, has recently been buying more government bonds at the same time as increasing his equity exposure, on the basis they perform inversely to each other.
The fact yields have risen means clients receive slightly better income than in the past, but this is not the central reason for Gutteridge’s investment, as he feels inflation will soon peak and yields will stop rising by quite so much.
But Roger Webb, deputy head of sterling investment-grade bonds at Abrdn, says yields are in nominal (ie without inflation) at the highest level they have been since 2014, and he thinks this will contribute to investors increasing their bond allocations in the coming months.
He says: “The higher yields now on offer present an opportunity that hasn’t been seen for some time. UK investment-grade credit hasn’t offered yields like those on offer now since 2014 and while high yield and EMD have seen bigger spikes [in March 2020], both markets are offering all-in yields that have seldom been seen in the past 10 years.
"With inflation touching double digits, these yields will clearly fail to keep pace, but assuming price rises slow over the coming years as policy tightening bites and economic growth falters, we believe that some value is definitely emerging."
Webb adds: "There are risks for the period ahead. With high inflation and rising rates, the consumer sector is feeling the pinch in the UK and elsewhere. As a result, a recession over the coming 12 to 24 months is not out of the question in a number of jurisdictions.
"This would, most likely, have negative implications for riskier assets such as equities and high-yield credit, but often these markets price in the risk before the event. An uncertain future often leads to volatility, but this can provide opportunities.”
From an multi-asset perspective, the higher yields contribute to higher income today, while, in the event of a recession, bond prices would likely rise as investors seek the protection of bonds.
This would reduce the level of income available, but the level of income from equities would also be falling in a situation whereby a recession was causing company earnings to fall rapidly.
Governments would, in all foreseeable circumstances, be able to repay debts, so government bonds would offer a measure of protection for income investors in a downturn.
david.thorpe@ft.com
