Fixed Income  

Investec managers add voices to fixed income fears

Investec Asset Management’s John Stopford and Philip Saunders have raised concerns about fixed income including the spectre of a bear market in the asset class.

Mr Stopford, co-head of fixed income at the group, said he thought the bull market in bonds was “finished” while Mr Saunders agreed the long positive run for bonds was in its “closing phase”.

The comments come after star multi-manager Patrick Armstrong warned earlier this month of potential double-digit capital losses in one of the most bearish fixed income forecasts yet.

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Invesco Perpetual’s star bond manager Paul Causer also last year poured cold water on the prospects for his asset class when he warned investors that equities looked to be a better bet than “large parts” of the bond markets.

Mr Stopford said some areas of the bond market now faced some potentially large headwinds.

“We think the bull market in developed market bonds is finished and they are likely to enter a bear phase for the next 12-24 months,” he said.

“The risk premium in credit is not much of a risk premium. Yields will move in line with government bonds so there is not much room for spread compression.”

Mr Saunders, head of multi-asset at the group, said investor “desperation” to secure income had resulted in “mini bubbles” in certain areas.

“In investment grade territory and government bonds, the prices there have been in a secular bull market that has lasted for my career and we are in the closing phase of that now,” he said.

“US high yield is yielding below 6 per cent, which is still an attractive return but implies a very low default rate.

“If you pursue unorthodox monetary policy it might help the banks and stabilise economies but it has all sorts of side effects.”

Mr Stopford, who was speaking alongside Mr Saunders at an investment forum at the group’s London offices, also warned of difficult conditions for investors if they all fled the asset class at the same time.

“The biggest risk which is not forecast is what happens if people try to exit the market simultaneously,” he said.

“It is not obvious to me what happens when the demand dries up. There is a scenario where credit spreads perform particularly badly if investors feel they need to get out of credit.”

Mr Stopford also warned of some potential upward pressure on sterling and expected that the pound could “lose its safe-haven status”.

“We have a currency which doesn’t look particularly cheap and lots of the things which made it attractive have faded,” he said.

“We have a weak government which might get voted out and they are talking about leaving the EU so will that mean we get decent investment from Europe or not?

“The AAA rating could be lost. Austerity is not working and we are about to get a new Bank of England governor who is talking experimentally.”