A key consideration for many investors when they buy bonds, particularly government bonds, is the role those assets can play in diversifying from equities.
That diversification benefit is determined to a large extent by present valuations.
Schroders fixed income investor James Ringer says bond markets are no longer pricing in a “hard landing” for the global economy, and instead he says valuations presently reflect “a 50 per cent chance that there is a soft landing for the global economy, and a 50 per cent chance that there is a ‘no landing’ (no real slowdown in growth) for the global economy”.
If the bond market is rather optimistic in its expectations of the global economy, Darius McDermott, investment adviser to the VT Chelsea range of multi-manager funds, says he is not sure that as a good thing.
His view is that credit spreads – that is, the extra yield an investor gets for buying riskier bonds, such as corporate debt – are not attractive right now.
With that in mind, he is focusing the corporate bond exposure in those funds on managers that specialise in selecting individual bonds, rather than who try to have a broad exposure to the whole market.
In contrast, his exposure to government bonds is mostly held in passive instruments.
For Pimco economist Nicola Mai the curiosity of bond markets right now is that the more risky the bond, the less value is on offer.
He says: “Valuations actually appear more expensive in the higher-risk segments of the market, so investors do not have to give up too much yield to shift exposure into better-quality, more resilient, more liquid areas. For example, our income strategy – we have shifted out of lower-rated and more economically sensitive corporate credit over the last year, and into higher-quality, liquid securitised markets that could potentially provide resilience and price appreciation in a range of economic scenarios.”
But he says that he does feel there is value to be had in lower-risk bonds, as while they yield less, as inflation falls, so the spending power of that income increases, with Mai commenting: “Investors can lock in yields for longer, benefit from rate cuts that will eventually occur alongside the slowdown in inflation and potentially get a much higher return than they can get from cash today.”
Abdelak Adjriou, manager of FP Carmignac Global Bond Fund, is focused more on finding value by taking credit risk rather than duration risk in the current climate, as he says there is less value in the latter due to the influence unpredictable central bank policies have on bond markets.
Credit where its due?
Eren Osman, managing director of the wealth business at Arbuthnot Latham, takes rather the opposite view, cautioning that investors risk being underweight duration as they focus on taking credit risk.
