Bond fund managers have once again warned investors could be facing a fixed income calamity next year, in an echo of last year’s gloomy bond forecasts that proved wide of the mark.
Undeterred by the failure of past predictions, a number of managers are eyeing the increasingly low levels of US and UK government bond yields as a red flag for the asset class.
Mark Holman, chief executive of fixed income specialist TwentyFour Asset Management, said returns from UK gilts would “struggle to be positive over the course of the year”, given the starting yield of just 1.9 per cent on 10-year UK government bonds.
He admitted TwentyFour had been “completely wrong” with its bearish forecast for gilts in 2014, but said everything still pointed to the asset class having a bad year in 2015.
Franklin Templeton bond chief Michael Hasenstab has forecast a similar scenario for US government bonds.
He said he was positioning his portfolios to “navigate what we think is a rising-rate environment”.
To prepare for rate rises, which are expected to lead to rising bond yields, Mr Hasenstab said he was making sure his funds had a short duration, meaning the bonds he invests in are less affected by changes in interest rates.
However, David Scammell, senior manager at Santander Asset Management, said there was “no compelling reason” for the UK and US to start raising rates in 2015 given the lack of strong economic data.
He said the backdrop for government bonds should be favourable, adding “there would seem no obvious reason to materially reduce exposure despite the low level of yields”.
A consensus view held by many at the end of 2013 was that UK and US government bond yields would rise, causing investors in those assets to lose money as the value of the bonds dropped.
This was based on the belief both countries, and others, would start to raise their interest rates in 2014.
But with rate rises being pushed further ahead in time, government bond yields fell this year, leading the asset class to deliver superior returns to many equity markets.
Elsewhere, the fear of negative returns from conventional government bonds has pushed certain fixed income managers towards more esoteric assets, which they hoped would be less affected by rising interest rates.
TwentyFour’s Mr Holman picked high-yield asset-backed securities as one of his top recommendations for 2015, predicting “high single-digit” returns for the asset class.
