Rathbones' Jones joins chorus going cautious on bonds

Rathbones' Jones joins chorus going cautious on bonds

Bryn Jones, fixed income director at Rathbones, is focusing on lower risk assets in the bond market in 2018.

Mr Jones runs the £1bn Rathbones Ethical Bond fund and the £105m Rathbones Strategic Bond fund.

The ethical bond fund has returned 10 per cent over the past year to 15 December, making it the top ranked out of 72 funds in the IA Sterling Corporate Bond sector.

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Over the past six months, the bond market has been nudged from favour due to greater levels of investor confidence around economic growth and higher inflation.

Higher inflation might be expected to cause a sell-off in many parts of the bond market, as the fixed income an investor receives from a bond has less purchasing power as inflation rises.

But Mr Jones believes it is “complacent” to think inflation will rise. He said the yields offered on riskier bonds do not justify the extra risks.

With this in mind, the fund manager has reduced his exposure to high yield and emerging market bonds.  

He has bought US government bonds, traditionally viewed as the lowest risk segment of the market.

Mr Jones said he is not predicting any kind of financial collapse, but said investors shouldn’t take it for granted that inflation will rise, despite the positive economic outlook, and so riskier assets which are priced for higher inflation are a bad bargain.

He said the low level of interest rates in world over the past decade may have contributed to deflation, rather than, as policy makers intended, to inflation.

The fund manager said: “So when I was younger, maybe if my parents wanted to buy a car, and they had savings, the savings could be earning 6 per cent interest. Now, the car dealer knows the rate of interest is 6 per cent, so he feels he can comfortably put the price of the car up by 3 per cent. Now, I’m a guy working and I want to buy a car, but I have no savings. I say to my employer that prices are going up by 3 per cent, and maybe my wages go up by that much, and you have inflation.”

He added: “But in an economy where the car dealer knows savings are earning nothing, he can’t put the price up by 3 per cent, and an employee can’t get a pay rise, so inflation doesn’t rise, no matter how well the economy is doing.”

John Chatfeild Roberts, who runs the Merlin range of multi-manager funds at Jupiter, said there are three ways in which the policy of quantitative easing has contributed to deflation.

The first is that low bond yields mean company pension funds run into deficit, requiring an injection of cash from the company, cash that otherwise could have been used to expand the business, or pay higher salaries.