The recent turmoil in equity markets was not enough to make bonds attractive investments, according to several multi asset investors.
The equities market has seen increased volatility in recent weeks after years of steady growth but instead of looking to buy bonds many are adding defensive equities to their portfolios as they believe the reward from bond investments will remain limited.
David Jane, who jointly manages £900m across a range of multi-asset funds at Miton, said: "The reason there is heightened volatility in the market right now is because the policy of quantitative easing and lower interest rates is coming to an end.
"For years there was so much cash in the system that almost every asset went up, so people bought the riskiest assets and they went up. That is leading to the markets fleeing the extremes right now, the riskier assets, but the impact of the end of QE is higher interest rates and higher bond yields, but bonds have not actually sold off yet, its almost every other asset that has sold off, but it will be bonds soon."
Mr Jane said investors in government bonds were "buying a risk asset but not getting a return like a risk asset, it is a return much closer to cash."
Andrew Herberts, head of private investment management at wealth manager Thomas Miller Investments, said he expects wage inflation to continue to pick up in developed markets, contributing to higher inflation, which is generally bad for bonds.
Both Mr Jane and Mr Herberts have been adding more defensive equity exposure to the portfolios they run.
Mr Jane said buying bonds with a higher risk level in order to achieve a higher return was also likely to prove inefficient in the current market climate, because as the yield on lower risk products such as US government bonds rises, the higher yield available on higher risk assets becomes less attractive.
He said: "There is a type of investor in the market, I call them yield tourists, the main reason they own any asset is for the income.
"Now when QE made the yield on low risk assets fall, they moved further and further out the risk curve, buying riskier assets, including riskier bonds. But as QE comes to an end, the yield on lower risk assets, including lower risk bonds, will rise, and those yield tourists will move to the lower risk assets, and so the price of higher risk assets will fall."
When the yield on a bond rises, the price falls. Mr Jane’s bond exposure is largely confined to lower risk assets, with a short date to maturity.
Peter Sleep, investment manager at 7IM said: "It is hard to love the bond markets at present. This year it has been hard to make money in bond markets and investors are lucky if they have not lost capital."