The advent of negative yields on huge swathes of government debt coupled with central banks increasingly cutting rates into negative territory has left many bond managers struggling to find the positives in today’s market.
With that in mind, Citywire Selector canvassed three bond managers covering global, UK and high yield bonds to uncover the best ways to navigate this negativity and understand when things could potentially normalise.
Hard to shake
The push into negativity – both in yields and rates - will last a long time because the only thing that will change it is a meaningful step-change in growth and or inflation expectations.
‘There are no obvious signs in the market, the economic data or earnings that we are seeing at this point that suggest this negative world will change anytime soon,’ he told Citywire Selector.
However, Lundie said he wouldn’t describe the current environment caused by bonds dropping into negative territory as overly negative in terms of sentiment. ‘Some of our funds are up 8% in the year, so there’s not too much doom in terms of the actual returns that are being made.’
Lundie added that he has never seen an environment where the starting point in government yields is so low. ‘Potentially people are unappreciative of the risk of the correlation between risk assets changing to a more positive relationship in coming years and I think that would be a big risk to the market.’
Not just central bank blunders
Meanwhile, Citywire + rated Ben Pakenham, who runs several strategies including the Aberdeen Global - Select High Yield Bond and Aberdeen European High Yield Bond funds, said the negative feeling will last a long time, as it is not just a function of monetary policy.
‘The truth is, governments need to do more. In the UK and Europe we have lived in an environment of fiscal austerity for the past six years,’ he said.
‘Monetary policy can’t do everything, it can create an environment within which growth should be more easily achieved, but you still need private consumers and the government to do their bit as well.’
Pakenham said, even though all-in yields don’t look very attractive by historic standards in the European high yield market, the return is fruitful. ‘For the default risk you are taking, over the short to medium term, you are being relatively well compensated.’
However, JPM’s bond veteran Nick Gartside who is also named on several funds, including the JPM Global Strategic Bond and JPM Global Bond Opportunities funds, believes central banks only care about two things, economic growth and the rate of global inflation.
‘Both of those things are very low at the moment. Global inflation is very low so the risk is that central banks around the world will reduce policy rates further. This negative sentiment will last a long time but if the BoJ and the ECB reduce interest rates, it will support the fixed income market.’
Gartside added that those bonds already with a negative yield will probably have an even greater negative yield, and of course this makes bonds with positive yield more attractive.