Investors should take note when even bond managers no longer like bonds, particularly when the bond manager in question is M&G’s veteran fixed income star Richard Woolnough. He points out that bonds, in some cases, no longer have any yield advantage over cash, and therefore cash may prove a better option.
In his blog, he says: “Developed bond markets are now at the point where the income on a ten-year bund and a 100-euro note is exactly the same (zero) and the yield advantage of owning a ten-year bund is gone. However, the potential capital gains and losses of owning a bund still exist. Consequently, at these low yields I believe the upside for bunds versus cash is limited.”
Woolnough has also moved to ‘negative duration’ on his UK government debt holdings for the first time, in a clear sign that he also considers parts of this bond market to be over-valued. In this, he is in sympathy with the findings of the latest Bank of American Merrill Lynch global survey, which showed 54 per cent of fund managers believe that equities and bonds are overvalued.
So what should investors do when even fixed income investors no longer like fixed income? There are a limited number of reasons to invest in a negative yielding bond. The first is the ‘greater fool’ theory. It may not pay an income, but you might find someone to take it off you at a higher price. Alternatively, deflation might really take hold and the bonds subsequently look more attractive. The final one is that negative interest rates and/or further quantitative easing are imposed.
None of these are impossible, or even improbable. However, is it just me, or is this vaguely reminiscent of the end of every bubble? People appear to be grasping at straws as to why the current pricing can be sustained, while ignoring the elephant in the room – that it really can’t be sustained indefinitely.
Yes, there are ways that bond yields could fall further (and therefore prices could rise). And yes, bond yields have continued to surprise investors as central bankers have eased and then eased some more. However, just because it hasn’t happened yet, doesn’t mean it can’t happen in future.
The above is provided for information purposes only and we recommend that professional independent advice is taken prior to making any decisions or taking any action.
In his blog, he says: “Developed bond markets are now at the point where the income on a ten-year bund and a 100-euro note is exactly the same (zero) and the yield advantage of owning a ten-year bund is gone. However, the potential capital gains and losses of owning a bund still exist. Consequently, at these low yields I believe the upside for bunds versus cash is limited.”
Woolnough has also moved to ‘negative duration’ on his UK government debt holdings for the first time, in a clear sign that he also considers parts of this bond market to be over-valued. In this, he is in sympathy with the findings of the latest Bank of American Merrill Lynch global survey, which showed 54 per cent of fund managers believe that equities and bonds are overvalued.
So what should investors do when even fixed income investors no longer like fixed income? There are a limited number of reasons to invest in a negative yielding bond. The first is the ‘greater fool’ theory. It may not pay an income, but you might find someone to take it off you at a higher price. Alternatively, deflation might really take hold and the bonds subsequently look more attractive. The final one is that negative interest rates and/or further quantitative easing are imposed.
None of these are impossible, or even improbable. However, is it just me, or is this vaguely reminiscent of the end of every bubble? People appear to be grasping at straws as to why the current pricing can be sustained, while ignoring the elephant in the room – that it really can’t be sustained indefinitely.
Yes, there are ways that bond yields could fall further (and therefore prices could rise). And yes, bond yields have continued to surprise investors as central bankers have eased and then eased some more. However, just because it hasn’t happened yet, doesn’t mean it can’t happen in future.
The above is provided for information purposes only and we recommend that professional independent advice is taken prior to making any decisions or taking any action.
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