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Weak economy to prevent ‘bond bubble’ bursting
Andrew Wells, global chief investment officer at Fidelity Worldwide, says that inflated fixed income prices will hold as market volatility continues in 2013.
A widely-feared ‘bond bubble’ is not about to burst in investors’ faces, says Fidelity Worldwide’s chief investment officer of fixed income Andrew Wells, who believes the macroeconomic environment will continue to support inflated prices.
The popularity of bond funds has given rise to concerns that a bubble could be developing in the asset class as the market chases high-yielding investments that are perceived to be more stable. Bond funds were the best-selling retail funds from January to August this year according to the Investment Management Association (IMA).
Wells explains: ‘To really change the overall strength in the fixed income market you have to assume we’re entering a high-growth market where interest rates go up and I don’t see that happening.
Wells adds that concerns about fixed income valuations have been around for a long time and despite fresh fears the asset will continue to be popular.
He explains: ‘It has very often been a question over the years…and yes, it’s inflated to a degree however that could go on for a long time as we have a lot of uncertainty and a lot of investors are very concerned about volatility.’
However other fund managers have been warning about a bubble in government bonds since the summer. Peter Geikie-Cobb and Paul Thursby, managers of the Thames River Global Bond fund, have been shorting UK gilts and German bunds whilst recommending investors to sell out.
Wells expects market volatility to continue as the recovery period is prolonged and central banks continue quantitative easing (QE) asset purchase schemes.
Wells adds: ‘We’re hooked on this [QE] as it’s the last viable solution that’s not totally disruptive to markets. Until levels of unemployment come down in the US, the Federal Reserve will pursue this route and we won’t see hike in interest rates until 2015.’
Although he expects investors to continue to invest in bonds which deliver negative real returns, or returns below the rate of inflation, he thinks a change in market sentiment could lead to many companies taking advantage of the appetite for fixed income.
Wells adds: ‘There aren’t a lot of high quality institutions out there and people are going to continue to buy what’s there but if we get a recovery you may see some companies re-leveraging their balance sheets to take advantage of the financing opportunities that are out there.’
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