After a very poor year in 1999, the medium term outlook for bonds is improving as higher interest ra...
After a very poor year in 1999, the medium term outlook for bonds is improving as higher interest rates are reducing expectations of inflation.
Even though in the US, growth is strong, there is no sign of inflation, yet the bond market remains nervous. Paul Thursby, manager of Global Bond Trust, commented that US budget is now in surplus, so issuance would be limited, which made the current nervousness all the more surprising.
He said: "The market has worried that the Fed has reacted too slowly but it is clear now that a tightening policy is in place. The effects of the quarter point rise earlier this year should begin to show through in the summer. The oil price should also peak and ease later in the year."
He added that the performance of his fund has been disappointing but the strength of sterling has not helped the portfolio nor had the fund's preference for the euro over the yen.
He concluded that bonds have underperformed compared to equities but such divergence of performance is unusual and generally is not sustained. At current valuation levels bonds are a good insurance policy for other asset classes, he said.
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