The backdrop for fixed interest apparently leaves few opportunities for significant capital gains am...
The backdrop for fixed interest apparently leaves few opportunities for significant capital gains among the major government bond issues in the short term.
While worldwide inflation is seemingly under control, global growth is picking up, leaving a potential threat to the asset class in the future.
Joe McKenna, fund manager at Britannic Asset Management, said: "The government bond markets will not recover until second half of 2000 at least. The US economy will continue fairly strong this year, the UK should keep on growing, while Europe is recovering and Japan is at least getting better. In general world economic conditions are improving which is not good for bonds, particularly as interest rates could go up further in UK and US."
Britannic is forecasting that 6% will be the peak for UK and US short rates, and after that the bond market may start moving again - or as soon as investors are convinced that the interest rate trend will be on its way down once more.
That may not be until much later on this year, according to McKenna.
In terms of asset allocation, he favours US Treasuries as the US is the furthest down the road to loosening monetary policy and reducing interest rates. It is more likely that, of all the world economies, the US will slowdown first, he believes.
Even so McKenna warns that for the sterling investor, currency would be a prime consideration.
He says: "In terms of total return, I would favour euro bonds. This is not because the bonds are better value but the prospects for the currency are better. We think the euro is oversold and there is a case for recovery as the growth cycle in Europe improves."
Threadneedle Investments shares the same outlook for sovereign debt. Laurence Mutkin, head of fixed interest strategy at Threadneedle, says: "The outlook for government bonds is what it is supposed to be - unexciting but safe. The forecast for the next 12 months is for dull returns."
Mutkin adds that real yields are currently not unattractive on an historical basis because inflation is under control.
For example, in the US inflation is relatively low, in spite of low unemployment, with core inflation at about 2.2%, and likely to stay around that level.
He says: "On yields of about 6.3% you are earning about 4% which in an historical context is quite acceptable."
Threadneedle's predictions in December for total returns from sovereign debt for 2000 was 7.5% from US Treasuries, 6% from euro-denominated debt and 4% from gilts.
These figures were calculated from existing yields and forecasts for upticks in prices. Mutkin says that the US ends up looking the most attractive purely because the yield level in the US is higher than anywhere else.
As for gilts, Mutkin is mildly bearish on the basis of the lack of supply and intense demand from life companies attempting to match liabilities under the minimum funding requirement which is pushing prices higher.
He also considers that much of the good news on inflation may be priced into already stretched valuations.
Mutkin adds that investors should think hard about currency risk, particularly as sterling-based investors in US Treasuries last year were affected by the weaker dollar. He notes that a 2% fall in the value of the dollar cancelled out all the extra yield from US bonds and warns that the euro may become even more undervalued than it is currently.
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