PA ANALYSIS: Is now the time to be flocking into bonds?

Added 31st August 2017

Investors' love affair with bond funds shows no signs of abating, with recent statistics from FundsNetwork showing the Sterling Corporate Bond sector was the most purchased peer group in July.

In the fixed income space, Bierre says yield is particularly hard to come by in terms of both duration and spread premia. Moreover, the risk of rising yields is considered high as central banks prepare for more normalised monetary policy settings. 

As a result, he says the appetite for short duration and high yield type products has been strong. “Similarly, investors have been entering the illiquid space in order to get the levels of returns they would have previously found in liquid debt,” he adds.

“These products tend to perform well if the macroeconomic scenario unfolds in the expected benign way and a lot of investors are playing one side of the risk scale, namely that risk is suppressed, an assumption that has so far been proved correct.

"However, if there is some kind of turmoil and risk appetite fades, investors are likely to suffer when exposed predominantly to these asset classes, unless they have very long time horizons of 10 years or more.”

Indeed, with unusually suppressed headline volatility and high asset prices, Bierre says a risk-friendly environment is by no means a given. As a result, he says the focus at Nordea is on building portfolios that can perform regardless of the macroeconomic scenario. 

“We are increasingly struggling to find attractive returns among both defensive and more risky fixed income assets,” he says.  “Investors at the moment seem clearly more concerned about low government bond yields than about tight credit spreads, but we take a more balanced perspective.”

Bierre says some credit spreads today are so low that investors are no longer being reasonably rewarded for the risks they are taking. As a consequence, he runs a tactical risk reduction on the credit side of its portfolios. 

“Although we may have been a little premature in our de-risking, we think it is prudent to approach credit markets with some caution, when spreads are tight and generally unattractive,” he says.

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Adam Lewis

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Adam has been a freelance journalist and content editor since 2015. A journalist and editor with over 15 years experience, until 2015 he worked as editor of Fund Strategy for three years, and worked on the same title as deputy editor there seven years. Prior to this he was reporter at Investment Week.

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