Demand for bond funds will return in spite of growing concerns about the impact of the US Federal Reserve’s decision to slow its quantitative easing programme, according to Pimco’s Douglas Hodge.
Mr Hodge, managing director and chief operating officer at the California-based bond specialist, said investors had withdrawn roughly $75bn (£48.3bn) from fixed income funds in June and July, but maintained that several factors were still acting in favour of the asset class and the idea that bonds were now more risky than equities was “untenable”.
He described the sell-off as an “inflection point”, and forecast that it would form part of an “S-curve” rather than a longer-term decline in bond markets.
Mr Hodge pointed out that, at least in the US, pension funds and insurance companies have continued to buy into longer-dated bonds, which are more sensitive to changes in interest rate expectations.
“We expect individual investors will eventually follow suit, once more becoming net investors in fixed income,” Mr Hodge said. “Even if rates continue to rise, they would likely do so more gradually from here rather than suddenly spike.”
He added: “As rates reset at higher levels, yields will likely increase, enhancing the opportunity for bonds to provide even more attractive return and income.”
Pimco founder Bill Gross, manager of its giant Pimco Total Return bond fund, took up a short position in US government bonds two years ago but has since abandoned it as the position hurt his fund’s performance.