M&G’s Anthony Doyle issues bearish bond warning

The group’s Anthony Doyle, director and head of fixed income investment specialists, said the risk of large falls in the value of bond holdings was now starker than they had ever been.

This call comes after almost two weeks of major sell-offs in government bond markets, which have seen the German 10-year bond yield surge from 16 basis points (bps) at the end of April to 62bps last week.

“Looking at historic returns, drawdowns and correlations give a useful guide to how fixed income returns might be impacted in a world of rising yields,” Mr Doyle said.

“[But] the collapse in yields across the fixed income spectrum now means investors are at greater risk of higher drawdowns than ever before, and the income component of their total return is unlikely to adequately compensate for any hits to capital returns like it would in the old days.”

The manager said “now more than ever”, how sensitive bonds were to interest rates rises – known as duration – was contributing to bond returns.

In the event of a rate rise, government bonds are likely to react the most, followed by investment-grade and then high-yield debt.

“It would not take much in terms of higher bond yields to cause a record drawdown in government bonds,” Mr Doyle said.

“Future returns from fixed income are likely to be much lower than investors have historically experienced.”

He added government bonds did experience losses, even though they were often referred to as risk-free investments.

“Arguably, the chances of losses have never been greater given the collapse in bond yields around the world,” Mr Doyle said.

However, the manager added there were still some “good reasons” to own government debt given, “high global debt levels, structural deflationary forces and the global savings glut”.

In terms of corporate debt, Mr Doyle said historically investment grade, the next rung up the risk spectrum, had “shown a relatively low probability of generating a negative return in a calendar year”.

“However, investors should be aware that investment-grade corporate bonds have proven to be closely correlated to government bonds,” he said.

In terms of high yield, Mr Doyle said these bonds experience “far greater volatility” than the more defensive areas of fixed income.

“That said, the higher yield on offer does protect against any possible increase in yields, as does the shorter duration profile of the high-yield asset class,” he added.