M&GJan 27 2017

Leaviss warns bond investor 'enemy' to return

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Bond manager Jim Leaviss has forecast the potential "return of inflation” is the macroeconomic event that will have the biggest impact on bond markets in 2017.

Mr Leaviss, head of retail fixed interest at M&G Investments, said he had seen the first signs of inflation, which he called the “big enemy of a bond investor”, although he was not sure how long this “inflation burst" is here to stay.

“We’ve been in a deflationary world for a decade with inflation rates nowhere near central bank policy targets of 2 per cent,” he said in a video interview with FTAdviser.

“But this year thanks in part to the oil price rebounding quite dramatically from its lows, almost everywhere is going to have inflation at 2 per cent and in the UK in particular with sterling devaluation as well it could go well above 2 [per cent].”

He added that meant he owned some inflation-linked assets in his M&G Global Macro Bond fund.

Mr Leaviss explained his fund is also positioned with very short duration as inflationary pressures continued to rise.

“I still think there are big risks for the UK economy surrounding the triggering of Article 50 and Brexit, so I want to be exposed to a diverse range of global currencies as well,” he said. “So outside the sterling area I’m invested in things like the US dollar and even now the Japanese yen which looks cheap after a big devaluation.”

Mr Leaviss founded the M&G Bond Vigilantes blog 10 years ago and has recently published a book bringing together the latest five years of commentary from the fund group’s fixed income team.

He recalled his very first blog under the Bond Vigilantes banner documented the Bank of England hiking interest rates to 5 per cent.

The biggest change he has seen in fixed income markets over that time is the huge amounts of quantitative easing issued by central banks.

He added: “The question is now we’ve had all this monetary policy thrown at the global economy and it doesn’t seem to have stimulated huge levels of growth so the next question is if monetary policy doesn’t work then maybe it is time to try fiscal policy, and maybe that’s why we’ve seen the success of people like Donald Trump promising to get America growing again.”

eleanor.duncan@ft.com