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Allocations may need re-think as bond risk increases

Allocations may need re-think as bond risk increases

The risk in allocating to bonds has increased over the past year, mainly because higher interest rates or inflation threaten to cause a sharp fall in prices, according to the guests on the latest FTAdviser podcast.

Rupert Thompson, chief investment officer at Kingswood, said: “The risks are all one sided, that the tapering in the US happens at a faster pace than was previously expected, or at the pace expected, then they will be tapering by next March, and in the UK interest rates could rise even before then, in the next month or two. And in those circumstances, yields would rise and prices would fall.”

Eugene Philalithis, head of multi-asset investment management for Europe at Fidelity International, said: “Bonds still play a role in portfolios as a diversifier, but at the current valuations maybe not as much of a role as in the past. I think it's a case of can you look elsewhere for that diversification now.” 

But Dickie Hodges, bond fund manager at Nomura, believes that many of the concerns highlighted about the prospects for bonds also apply to equities, with the sell off in equity markets in 2018 when monetary policy tightened demonstrating this. 

He said: “Not all bonds are the same, and there are many bonds that still pay positive yields now.”  

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david.thorpe@ft.com