The head of Old Mutual Global Investors has pointed to what he described as the “lunacy” of the bond market, with the past year being plagued by sub-zero yields.
Speaking to FTAdviser, Richard Buxton said one thing 2016 will be remembered for is the end of the 35-year bull market in bonds, a point echoed by Jupiter’s vice chairman Edward Bonham Carter.
Mr Buxton said we are now seeing signs that deflationary fears are coming to an end as concerns about inflation start to return, adding however this could be a long drawn-out process.
“This suggests we have reached a major turning point in the bond market; interest rates will likely grind higher next year, led by rising bond yields,” he said.
The chief executive of OMGI pointed to the US economy, which could see incomes increase to address the populist anger at stagnant wages and inequality.
Donald Trump’s shock victory in the US election and the UK’s vote to leave the European Union are both thought to be a reflection of the anti-establishment mood, which is prominent across many developed nations.
Mr Buxton, who manages Old Mutual’s £2.1bn UK Alpha fund, also referred to the Bank of Japan’s acknowledgement that it was a mistake to move early to negative interest rates.
“[The Bank of Japan] changed tack to targeting long yields, albeit of zero, and bond yields worldwide started to rise.”
Over the course of this year, he said the “lunacy" of bonds issued with negative yields represented the “high watermark” of deflationary fears.
But he said monetary policy has now “run out of road” and has become counter-productive.
“The world needs an upward-sloping yield curve – higher borrowing costs for longer loans – to support banks’ ability to supply credit.”
Mr Buxton said negligible levels of interest rates – deemed by central banks to be the solution to a low growth world – are actually part of the problem.
“Crushing bank profitability and both corporate and individual animal spirits is not the answer.”
This year, he said, has been marked by populist backlash against fiscal austerity, stagnant incomes, and rising inequality.
“People have voted for change – and the bond market senses they have voted for inflation,” he said, adding it was “no wonder” the bond market is worried.
“How equities navigate between stronger growth, higher rates and in time a greater share of the pie going to labour instead of capital, will be the story, not just of 2017 but of many years to come.”
Looking at OMGI’s plans for next year, Mr Buxton told FTAdviser he expects to launch several new products, including alternatives, multi-asset solutions and single strategy funds.