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Bonds could struggle as volatility increases

Bonds could struggle as volatility increases

It will be impossible to make the same returns from bonds in the years to come as in previous years, according to the guests on the latest FTAdviser podcast.

Rising interest rates and inflation means 2022 has been a volatile year for markets with the Vix volatility index at a consistently elevated level.

Appearing on the podcast, Peter Doherty, fixed income fund manager at Sanlam, said: “It is a challenging environment, because while it looks as though rates should be going up because people’s personal balance sheets, but also corporate balance sheets have been quite robust and the take a rate rise, the nominal level of debt in the economy is so high that we are now in the unwind of a period where it was quite easy to make money from bonds.

"All of the government bond market and large parts of the investment grade bond market are uninvestable right now unless you are investing for regulatory reasons. The challenge is to make 3 or 4 per cent without taking huge risk, and just mathematically it is going to be difficult to make a real (after inflation) return.” 

Also appearing, Peter Fitzgerald, multi-asset investor at Aviva Investors, said it was difficult to predict the future direction of markets, because it was hard to determine what part of the cycle markets are in given that household savings actually went up during the Covid-19 recession.

He said: "It has felt like a tough year for equities, but actually the S&P is only down around 3 per cent. It is within the equity indices that we have seen volatility. I think the real challenge is in bonds, It will be difficult for us as multi-asset investors to make any returns from there at all.” 

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david.thorpe@ft.com