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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.

 
Weak economy to prevent ‘bond bubble’ bursting

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.’

4 comments so far. Why not have your say?

Chris Clark

Dec 04, 2012 at 17:27

I was speaking to a pension fund administrator £400m) the other day. Searching for returns, he well remembers George Ross-Goobey of Imperial Tobacco, who did his massive switch into equities when bond yields had dipped below 3%, and equities were yielding 4%

Story at:

http://www.independent.co.uk/arts-entertainment/obituary-george-rossgoobey-1088966.html

Capita Registrars forecasted 4.4% equity yield for 2012

http://www.portfolio-adviser.com/news/macro-news/uk-equities-predicted-to-yield

And current average bond yields today..?

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William Bishop

Dec 04, 2012 at 20:50

Could still be right for 2013, but, on some ill-defined longer view, Government bonds will prove to be a lousy investment.

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masud butt

Dec 04, 2012 at 23:04

I like to invest in EM corporate bond fund, any recomendations, thanks.

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Ian Holmes

Dec 05, 2012 at 05:06

Hi Masud

Run your slide rule over Templeton Global Bond Class A GBP MDis Distribution Units . Its one of the Hargreaves Lansdown "Wealth 150". I don't have a position in it (yet!) but its high performing and has a large EM exposure.. Mostly AAA to BBB rated.

Cumulative 5, 3, and 1-year returns: 101, 25.5 and 9.6% respectively

The H-L website (www.hl.com) will give you a detailed breakdown by country. (Fund analysis tab - then geographical analysis link). The "In detail" link will give you an analysis of debt quality.

33% Emerging Asia

25% Emerging Europe

9% South & Central America

and positions in Australia, Middle East and Singapore.

The rest is cash and the safer of the developed nations.

There's no UK exposure at all, so this would make a good complementary bond fund to any UK bond funds held.

Good luck. I hope to take a position in this myself soon!

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