The expected bond selloff has “already happened” and value is starting to emerge in some areas of the market, according to Liontrust’s head of fixed income Michael Mabbutt.
Speaking to investors at the company’s annual investor conference yesterday Mr Mabbutt, who runs the Liontrust Global Strategic Bond fund, said although losses may still materialise, he had begun to top up holdings in heavily-hit emerging markets such as Brazil.
The manager said US Treasury bonds performed as badly last year as they did in 1994, when a tightening of US monetary policy led to excessive volatility in bond prices. In 2013 US 10-year government bonds lost 7.9 per cent as yields - which move inversely to prices - rose from 1.76 per cent to more than 3 per cent.
“We have just had the big bond crash and are now starting to see real value,” Mr Mabbutt said. “Adjusted for inflation real yields have turned positive for the first time in years.”
Although he argued that “the bubble has popped” in many areas of the bond market, Mr Mabbutt said he had taken up a short position in US high yield bonds, betting that prices will fall.
High yield, or junk, bonds were one of the only areas of fixed income to post a significant gain in 2013. The Barclays US Corporate High Yield index gained 7.4 per cent during the year, according to FE Analytics.
“What is unusual is the divergence between most bond markets and US high yield,” Mr Mabbutt said, pointing out that the difference between US junk bond yields and the US government bond yield - known as the spread - has reduced dramatically.
“That gap has moved significantly relative to the emerging markets dollar bond spread,” he added. “High yield spreads are now insufficient in my opinion to compensate for the risk of default and the illiquidity risk.”
Mr Mabbutt said he had also begun shorting Japanese government bonds as the re-emergence of inflation in the country meant investors now would lose money by holding the bonds, which yield well below 1 per cent.
The Liontrust Global Strategic Bond fund has had a stough start following its launch in February 2013, its sterling hedged share class having lost 8.8 per cent since launch to January 21.
