"As yields have risen, it has become a major topic of discussion within our investment committee [whether to increase bond exposure]. My view right now is that it’s too early to do that, but it is an ongoing discussion.”
Simon Holmes, multi-asset investor on the Universal fund range at Columbia Threadneedle Investments, says: “Bond prices have been falling this year in response to higher interest rates, and that makes sense. I have been negative on government bonds myself for most of this year.
"But now I think it is more of a two-way debate. Yields are higher, which of course is more attractive, but also, we have a clearer idea now of what it is central banks care about. It is a relatively swift capping of inflation that central banks want.
"And while we are not out of the woods yet, it may be that inflation is close to peaking. There is also the issue of quantitative tightening, and there is uncertainty around that. But I think the market is aware of that, and it may be in the price to some extent.”
The extent to which markets may already be pricing in the range of negatives associated with bond investments can be seen in the “cushion” offered by government bond yields right now, according to Fahad Hassan, chief investment officer at Albemarle Street partners.
By this he means the yields are now sufficiently high as to provide a bit of margin of error in case the direction of travel in markets changes.
He says that as inflation peaks in the next “12 to 18 months”, investors will be able to access “massive real yields".
UK vs US
Holmes says there is little difference in the levels of volatility between the US and UK government bonds right now, but he says the government’s energy price policies may mean inflation peaks at a much lower level than had previously been anticipated, placing a limit on how high bond yields in the UK can go from here.
Kevin Thozet, portfolio adviser at Carmignac, says it is now possible to get yields in some government bond markets that are higher than the prevailing rate of inflation, making the yields, mostly in the US, positive both in real and nominal terms.
James Klempster, multi-asset investor at Liontrust, says: “It’s difficult to get excited about government bonds, the price is now close to 2011 levels. They are more interesting, but it would be a stretch to call them cheap. The reason we own government bonds is as insurance in a portfolio. They are not owned for a return.
