first state's kevin colglazier says term is a misnomer with markets safe at current levels
Fears of a bond market bubble were played down by First State at the Investment Week Markets 2003 Forum.
Kevin Colglazier, head of global fixed interest for the group, told delegates: 'We do not think there is a bond bubble either tactically or, over the longer term, strategically. Even the term 'bond bubble' is a bit of a misnomer. I make the case that it is safe for you and your clients to go into the bond markets at current levels.'
Colglazier pointed out that with high inflation 'defeated' and extremely unlikely to make any kind of comeback in future years, the real returns available on bonds should be seen as very attractive.
He added: 'If yields rise 100 basis points over the next 12 months, which would be a bad year for fixed income without a doubt, the average gilt fund will probably return about a negative 1%. But the capital that you will lose will be compensated for broadly by the income that you receive.
'In the corporate bond market you will probably see a flat to actually a small positive return should yields rise on average by 100 basis points. Given the magnitude of bubbles we have seen in the past, such as tech and housing, where losses were up to 50%, I do not necessarily see how in a worst case scenario losing a percentage point or two over the course of a year necessarily justifies being called a bubble.'
After three years of outperformance by fixed interest there are plenty of commentators who are predicting a bear market future for the asset class. By contrast Colglazier said that once low inflation had been factored in, and in Japan's case, deflation, commentators should see that bonds have only become slightly expensive because real yields would remain rewarding.
Those still opting for bonds will get a steady stream of income from lower, but still solid, real returns, according to Colglazier.
Bonds in the UK, US, Europe and Japan have massively outperformed equities in the past three years. Last year yields on British, American, European and Japanese 10-year bonds were 3.8%, 4.4%, 4.2% and 1.0% respectively. In the US, said Colglazier, bonds have had a very good three years, with yields falling from just over 6%.
Factors behind this fall, noted Colglazier, include the US economic downturn, a steep rise in unemployment and geopolitical worries. Taking all that into account, he concluded, the fall was reasonable.
Looking at the immediate future, Colglazier added: 'It will be very difficult for fixed income yields to rise aggressively. Still, over a couple of year holding periods the returns are still very attractive.'
In a subsequent presentation, Peter Geikie-Cobb, director of fixed interest for Insight Investment, suggested there was still value in long dated bonds and that global paper hedged into sterling was more attractive than UK fixed income.
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