A number of the positive factors buoying up the bond market in recent years may well become n...
A number of the positive factors buoying up the bond market in recent years may well become negative over the coming months, says Peter Lucas, global investment strategist at Ashburton.
Lucus says although pension funds have been steadily transferring their money from equities into bonds in order to lessen their liabilities, this may now be about to change.
In addition, Japanese investors have in the past been heavy buyers of government bonds but, according to Lucas, this looks set to end as a bottoming out of low volatility in Japan has been persuading them to chase volatility elsewhere.
But Lucas says the clearest sign there is a risk to bonds is central bank buying, which he believes may dry up. He suggests preconditions exist for many central banks to allow their currencies to strengthen which bodes poorly for bond markets. "Within China, not only are you seeing a desire among policy makers to strengthen their currency further but there is also a general feeling they have enough reserves now to do something more exciting with their money," he says. "They will not be willing to shovel loads of money into US treasuries."
Philip Vordran, investment strategist at Credit Suisse, agrees: "As the central banks of emerging markets start to diversify their foreign exchange holdings and reduce net purchases, it may bring an end to support for low yields. Fixed income markets remain under pressure and I continue to be bearish."
As a result, for most fund managers' bonds remain more of a trading instrument rather than buy-and-hold issues. Lucas has placed emphasis on buying short-dated bonds where the capital vulnerability is limited. In addition, he holds a small amount in Sweden, Norway and 10-year UK bonds but remains cautious.
Jonathan Cloke, director of government bonds at Legal & General, is also avoiding the long end of the market in the UK and buying up three-month duration bonds instead. He is also steering clear of UK index-linked bonds and opting for European index-linked bonds as an alternative.
However, for all the talk of doom and gloom, Lucas maintains there may be some hope. He says: "It's quite clear rising bond yields and rising interest rates are starting to bite on the property market. If rising interest rates are the straw that breaks the camel's back, global growth will slow and bonds will start to make a recovery."
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