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It’s a bond binge, not a bubble, says US giant

It’s a bond binge, not a bubble, says US giant

The changing landscape of society across Europe and the US is a regime change which could ultimately spell negatives for the bond market.

That is according to DoubeLine Capital’s deputy chief investment officer Jeff Sherman, whose team runs the newly launched Nordea 1 US Core Plus Bond fund.

Speaking to Citywire Selector, Sherman said when the market usually talks about a bubble, it’s not actually a bubble and believes 2016 has battled with overpricing in the bond market.

‘A bubble is where you have euphoria and a complete disregard for anything, and fundamentals in the bond market this year did become overpriced.’

‘There was massive uncertainty, people thought we were going to be in a low growth environment forever. You have benign inflation indefinitely and there was a break even in spreads – people were saying rates would have to continue to price down.’

Inflection point

Sherman said investors have lived and binged off debt for a long period of time, mainly due to demographics.

‘There is a natural buyer of debt due to the shifting demographics of the developed world, investors have lived and binged off of debt for a long period of time.’

'The inflection point for the bond market really hovered around the Brexit vote, the US rates market also took huge uncertainty from this decision.'

Sherman said the US corporate bond market is not robust enough and currently looks stretched, which is why some investors may think the bond market is trapped in a bubble.

‘The whole of the bond market is not in a bubble, this year we favoured emerging market debt, dollar-denominated corporate debt. This is where we have been taking our credit risk really more heavily across our multi-sector portfolios for the past couple of years.’

‘We hit extreme bearishness in US corporate bonds in the US back in August 2014, they were so grossly undervalued, the duration is long and the yield spreads were not there.’

US corporates

Sherman said a lot of managers still want to focus on US corporate bonds, but he believes the asset class does not have a high enough risk-reward opportunity and said the problem now is the new low in yields.

‘When the new low in yields first materialised everyone became bullish, post-Brexit we got extremely bearish on all odds, at least now there is some more opportunity there, at least in the short term.’

‘We rejected the knee-jerk reaction from Brexit and from the US election, and believe in this instance of weakness you should be adding to more government guaranteed debt in the US.’

Since inception, the Nordea 1 US Core Plus Bond fund lost 1.36% in USD terms. This compares to a 0.94% fall by its Citywire-assigned benchmark the Bloomberg Barclays U.S Aggregate Bond TR, over the same time period.

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