One of the main uncertainties for the fixed income market is the actions of central banks, including the US Federal Reserve, with regard to interest rates. Initial expectations were for a March or June rate rise in the US, but as these have weakened, the forecast has moved forward to July or perhaps later.
In its June ‘Asset Views’ report, the Whitechurch investment team points out that, overall, May ended up being a positive month across bond markets as demand for ‘safe haven’ government bonds remained robust: “Initially bond investors became concerned that the US Federal Reserve would raise rates in June and so government bonds came under pressure. However, these fears receded and yields across developed bond markets have continued to fall.
“Corporate credit also fared relatively well over the month. There has been a spike in euro-denominated bond issuance as we move closer to the implementation of the European Central Bank’s decision to buy select corporate bond issues as part of its quantitative easing programme. Issuance has been welcome as demand for yield continues to outstrip supply.
“Emergency-level yields in government bonds remains a challenge for investors as we move through 2016, and the assets remain unattractive in our view, offering ‘return-free risk’ at these current levels. But, overall, we continue to believe that interest rates will be lower for longer and so don’t expect the bond bubble to burst in the foreseeable future, just that returns will be uninspiring and not worth the risks attached.”
Meanwhile Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, points out the recent news that Germany’s benchmark 10-year bond yield has fallen below zero per cent for the first time, “is a reminder that investors need to rethink their approach to fixed income as the ‘Japanisation’ of Europe takes hold”.
He explains: “Central banks have become dominant players in bonds in order to fulfil their economic objectives. For investors, that is a serious problem. It means taking greater risk for very low returns in a stressed liquidity situation.”
