Fixed Income June 2017  

How sustainable are current yields in global economies?

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How to build a robust yield into a portfolio

Here, he says, investors should look into details at both the real yields and inflation expectations. “Upside risks would materialise there, should real GDP growth accelerate, or realised inflation shift higher,” he says.

Mini-cycles and rising yields

Chris Leyland, deputy chief investment officer for True Potential, is a little gloomy about the prospects for the near term, as he thinks there is little sustainability in general across bond and equity income yields.

He explains: “Dividend cycles tend to be quite long and usually end with a recession. This aspect is not particularly great for holders of corporate debt either, as yields and spreads rise, causing capital losses.

“We are not forecasting an end to the dividend cycle in the next 12 months. However we do believe the threat to income sustainability has increased, for some investors who are not doing their homework on sustainability and liquidity.

“These investors are most at risk from mini-cycles, which are likely in some segments of the market. When investors chasing yield sense danger, they panic, try to exit quickly and thereby push prices down and yields up.”

Mr Baltora is clear there are upside risks to bond yields, as in most advanced economies, they remain below the current rate of core inflation. Moreover, he explains a strengthening economy will also pose an upside risk. 

He adds: “Should real GDP growth accelerate, this would most likely lift real yields, and rising inflation would feed higher inflation expectations.”

Patrick Connolly, head of communications for Chase de Vere, agrees. He says: “In the medium term, it is possible yields will rise, particularly with regards to government bonds, some of which look very expensive.

“However, rising yields mean existing investors will suffer from capital losses and this will be a concern, as many people hold fixed interest to provide a greater degree of capital security in their portfolios alongside equities.”

Advisers therefore should keep on top of the bond allocation to make sure the income expectations of investors are being met where possible, without increasing the risk profile for the end client.

Pockets of problems

Fixed income managers are keeping their eyes on what central banks do.

Eugene Philalithis, portfolio manager for the Fidelity Multi-Asset Income Fund, is cautious over monetary policy decisions from major economies, for example.

He comments: “We should see continued upward pressure from the Federal Reserve tightening, but monetary policy globally might be a headwind to higher yields.