The fall in the price of many government bonds over the past month is the result of short-term factors, rather than a sustained shift in market expectations, according to Rupert Thompson, head of research at wealth manager Kingswood.
Mr Thompson said UK and US 10 year government bond yields have risen by between 0.35 and 0.45 per cent, over the past week.The yield rises when the price of a bond falls.
Government bond yields typically fall when investors are seeking a safe haven for their capital. Mr Thompson said the slightly better recent economic data in the UK and US is behind the rise in yields.
Better economic data should be inflationary, and so make the fixed income earned from a bond less attractive for investors. Additionally, better economic data makes it less likely that central banks will cut interest rates further.
Mr Thompson said: “In part, this rise in yields is just a rebound from levels which always looked excessively low. But it is also a reflection of somewhat better economic data – or more precisely, data which is no longer falling short of market expectations."
He added sentiment has also been encouraged by the "token gestures" made by the US and China last week to repeal some tariffs ahead of the talks planned for coming weeks.
Mr Thompson said the rebound in bond yields has fuelled a sharp reversal of one of the major trends present within equity markets over the past year, "and indeed for the most part since the global financial crisis" – namely the marked outperformance of growth stock over value stocks.
"This bounce in value stocks could have further to run near term not least because they are unusually cheap compared to growth stocks," he said, though added he was sceptical that this is the start of a major period of outperformance by value, which tends to do well in periods of either recession or strong economic growth.
Fahad Kamal, chief market strategist at wealth manager Kleinwort Hambros said government bonds remained unfavourable in the current climate.
He said: “Expected returns for equities over any reasonable length of time still far outweigh those from government bonds, which are offering historically low, often negative yields.
"However, equities can be volatile – thus we continue to have significant allocations to government bonds despite record low yields. We also hold a meaningful allocation of gold in most strategies, which is facing a reduced opportunity cost headwind in a low-yield environment. “
Peter Elston, chief market strategist at Seneca, is reluctant to invest in equities given the valuations, but is also shunning government bonds, and instead prefers alternative investments.
david.thorpe@ft.com
