He says the fact that bond yields have only returned to 2019 levels, when he says the consensus was that secular stagnation was happening, and if the market really believed that had changed, yields would be much higher right now.
Mark Munro, investment director for fixed income at Standard Life Aberdeen (rebranding as Abrdn in the summer), says he expects high inflation this year and next as economies recover, but then for inflation to moderate in the years ahead.
He says many companies have racked up debts to get through the pandemic and will have to focus on paying it down, rather than expansion, and this is likely to put a peg on inflation and bond prices over the longer term.
John Butters, chief investment officer at Weatherbys Private Bank, says: “We continue to hold conventional bonds in our client portfolios. They continue to dampen the inevitable volatility you expect from equities as they act as a shock absorber in bad times – it's still true that when equities go down, bonds tend to go up.
“While there is increasing talk of higher inflation, investors should never forget the risk of deflation. If there is the political will to do so, central banks can control inflation by putting up interest rates. There is not such a simple policy tool to prevent low inflation or deflation. We have seen that with Japan’s struggle to reignite inflation over many years and conventional bonds can be a useful deflation hedge in a portfolio.
“Portfolio construction is about balancing assets in order to balance risks, and we continue to help conventional bonds for those reasons. Any gradual rise in yields should be likened to recharging a battery: it will provide greater scope for bonds to protect in the future.”
Bond investors either shape their fund around duration risk or credit risk – the former means managing the length of time until the bonds in a fund reach maturity, the latter means managing the economic sensitivity of the portfolio by buying bonds with higher or lower credit ratings.
Investors who fear rates are likely to rise would typically own short-duration bonds, as those bonds would have matured and the income received, before the higher rates come in and devalue the income.
Those expecting recessionary conditions would typically buy bonds with less credit risk, and potentially a longer date to maturity. The latter is because, if a recession comes, policy makers would typically cut rates, making the longer-term fixed income from a bond worth more.
Liontrust's Milburn says in the current climate he wants to have as little rate risk as he can, so is short duration.
