Everyone's talking about... Bonds
Professional Adviser Author: Laura Miller
In the fourth part of our series looking at the most topical investment themes for the quarter
ahead, Professional Adviser asks multi-managers: with yields nearing negative territory, are
bonds 'uninvestable'?
Bond yields - especially on sovereign debt - are low and getting lower, as investors seek safety
amid falling oil prices and deflation fears.
Germany's 10 year bonds went on sale on 14 Janaury with a coupon of 0.5%, the lowest ever for a
euro-area 10 year security. Gilts dropped to below 1% after UK inflation fell to a 15-year low.
The biggest surprise for everyone this year is [going to be] that sovereign bonds won't do the
suicide thing everyone has been expecting.
If yields fall so far they turn negative, investors buying the securities will get less back when the
debt matures than what they paid.
Multi-managers - who look across the whole investment universe - give their view on whether the
asset still merits a place in portfolios...
Miton head of multi-asset David Jane
What is going on in bond market yields, the moves we've seen are falling ever faster. This doesn't
usually happen. It looks like a capitulation to deflationary pressure, or a bubble. Take the German
bund - you'd be better off if you locked your euros in a draw for five years.
Investec Asset Management multi-asset strategist and
portfolio manager Max King
Demand exceeds supply. It is probably in the end game for the bond market.
The German bund has a negative yield, but that is not odd at all - the bund is a safety play for a lot
of Europe. The easiest way for Italian car workers, for example, to buy ultra-safe European assets
is the German sovereign bond, rather than a bank. Bonds are not as overvalued as is widely
supposed.
Schroders multi-manager fund manager Robin McDonald
In the bond market the margin of safety is wafer thin. We're steering clear of it.
JP Morgan Fusion multi-manager Nicholas Roberts
Government bonds to us are one of the asset classes that are still truly defensive. They are not
'uninvestible'. I still think yields could go lower. Government bonds still merit a place in
portfolios.
Last year everyone thought bond yields would be going up - now the expectation is the yield curve
will flatten in the US. People are less bearish on bonds this year than last.
City Financial multi- managers Peter Toogood and Anthony
McDonald
We're not bears on sovereign bonds. The biggest surprise for everyone this year is [going to be]
that sovereign bonds won't do the suicide thing everyone has been expecting. We're still
diversifying into them.
F&C multi-managers Gary Potter, Rob Burdett, Anthony
Willis, Scott Spencer
It depends on how much money comes out of that market as to the impact that will have. We're
underweight bonds. It's at the point where there is hardly any value in the bond market.
In high yield, if oil falls to $40 a barrel, there's going to be some banks and hedge funds exposed
to oil that will have a problem.
Henderson multi-manager James de Bunsen
We've been underweight bonds for a long time. There is a shortage of triple A assets, so they have
scarcity value.
The main reason US bonds have ended up lower is due to [concerns about] Europe - if you want to
hold ‘safe' assets but your local market yields are lower, why not buy US Treasuries? The falling
Bund made people look to the US and UK government bonds.
Legal & General multi-asset fund manager Justin Onuekwusi
We expect more volatility in bonds. Defensive and cautious investors have got to diversify their
bond holdings - you can't just buy and hold gilts.