"Government bonds have a greater role to play now than they have for years, as they are the real diversifiers within portfolios.
"And I think that in the medium term, portfolio returns will be more variable, with some periods of very high returns and some of lower returns, and that is the sort of environment where people want to own diversifying assets”.
Guillaume Paillat, multi-asset manager at Aviva Investors, says one way to manage the volatility is to increase bond exposure at a time when the diversification role they play is likely to be most needed within a portfolio.
He says that with concerns around the trajectory of the global economy, “when the shocks have happened, when we move from the inflation shock to growth shock, that is when bonds can do their job, and this represents a change from recent years when the correlations between asset classes was more tricky”.
With regard to where to allocate within the bonds universe, Michael Walsh, a multi-asset investor at T Rowe Price, says: “You can invest in areas such as emerging market debt and high-yield debt, and the yields there are quite attractive – to some extent that is because those are relatively less liquid asset classes.
"But to be honest, the yields on investment-grade now are around 5 per cent, and when they are at that level I’m sure one needs to go anywhere else if yield is the priority.”
James Klempster, deputy head of the multi-asset team at Liontrust, places this shift in the bond market into context, remarking that one can now get 3 per cent on low-risk government bonds, whereas until this year, to get a yield of 3 per cent, one had to own corporate bonds, which are higher risk.
But he is more cautious on the investment case for high-yield bonds, taking the view that one needs to be very selective in that part of the market due to the enhanced risk levels.
David Coombs, head of multi-asset funds at Rathbones, says that in the current uncertain economic climate, owning bonds with a short date to maturity offers some protection against higher interest rates, while owning bonds that incur less credit risk may be the best value option right now, given the prevailing economic uncertainty.
Hugo Thompson, multi-asset investment specialist at HSBC Asset Management, says: "While the most appealing yields are in lower rated bonds, our portfolios are focused on higher quality credit markets; motivated by our near-term cautious outlook on the global economy.
