While the yields presently offered on bonds are attractive, investors buying the asset class in anticipation of capital gains may be disappointed, according to the guests on the latest FT Adviser podcast.
Dean Cook, multi-asset investor at Aviva Investors, says that with yields on even short-duration bonds being about 5 per cent, investors have had no need to take interest rate risk by going further out the curve.
Typically if interest rates are being cut, that would benefit longer duration bonds and lead to price increases.
But Cook feels that based on what is currently priced into valuations, and the potential for inflation to persist, “if you want long-term capital gains from bonds you could be waiting.”
Tim Foster, fixed income fund manager at Fidelity, said he expects a little bit of capital appreciation from bonds but the bulk of returns to come from the income yield.
James Klempster, deputy head of multi-asset at Liontrust, said that multi-asset investors have for years “almost been forced to own equities for income” due to bond yields being so low, but yields are now at a level where one does not need to take extra credit risk.
You can listen to the podcast above, which discusses the impact on equity and bond markets of rates falling, and what it all may mean for diversification, by clicking on the link above.
david.thorpe@ft.com