JPMorgan fixed income team warns on ‘false rally’

This month’s ‘risk-on’ rally in the markets has lacked conviction and may be “false”, according to JPMorgan Asset Management.

Nick Gartside, international chief investment officer for fixed income, said markets may have become complacent over the summer, and predicted an “Indian summer” as investors return from holidays “demanding answers to outstanding questions”.

Indices measuring volatility have hit long-term lows over the summer, an indication of stability and a lack of fear among investors. However, Mr Gartside said this could also denote complacency, adding that the rallies in equity and bond markets lacked conviction.

Iain Stealey, fixed income manager on JPMorgan’s international fixed income team, said: “Things you would expect to rally hard in a risk-on environment haven’t - for example, high yield [bonds]. People are being forced into risk as they are desperate for yield but also want their money back.”

During August the FTSE 100 index has risen 2.5 per cent, while the US’s S&P 500 index has risen 1.7 per cent. High yield bond funds have also posted gains, with the IMA Sterling High Yield bond fund sector gaining 1.4 per cent between August 1 and August 23.

Meanwhile, US and UK government bonds have sold off, with yields - which move inversely to prices - rising. This morning UK 10-year gilts were trading at yields of 1.56 per cent, compared with 1.44 per cent at the start of the month, while 10-year US treasuries yields rose from 1.48 per cent to 1.67 per cent.

The gradual gains contrast sharply to last year, when equity markets collapsed and government bond yields contracted, after rating agency Standard & Poor’s downgraded the US’s credit rating and concerns grew over the stability of the eurozone.