For many investors, developed market government bonds have long been viewed as expensive, with unorthodox monetary policies such as QE helping to drive yields down to record low levels.
The recent pick-up in inflation expectations, accelerated by the arrival of ‘reflationary’ US president Donald Trump, led to a sharp sell-off in many developed market government bonds late last year – leaving yields now significantly higher than one year ago.
Has value now opened up in developed market government bond markets following this sell-off, or is it still a time to be cautious? Below are the thoughts of five bond managers:
Bunds a safe haven alternative to treasuries
Volatility looks set to be a prevalent theme with a number of potential risk events and challenges. In the US, there is uncertainty over whether president Donald Trump can deliver on his electoral promises. Meanwhile in Europe, elections are due to take place in some of the region’s largest members, including France and Germany. We maintain a cautious approach, but continue to look for opportunities identified by our fundamental research approach to take advantage of any pricing anomalies and dislocations that might occur.
We maintain a long position in Germany as the ECB remains supportive through its asset purchase programme. In addition, given heightened US political uncertainty and the prospect of further interest rate rises from the Federal Reserve, we feel there is the potential for bunds to become a safe-haven alternative to US treasuries.
Arif Husain is portfolio manager of the T. Rowe Price Dynamic Global Bond Fund
Western government bonds remain expensive
Activity indicators are picking up globally, inflation is moving higher and major developed central banks are either finally contemplating to hike or, at least, not hinting to cut rates further into negative territory. However, it is worth noting that firstly, rates are already at very low levels in terms of economic growth, inflation and key policy target rates, and secondly, we do not expect meaningful or sustainable overshooting in these three key variables in the future as the nasty trinity of poor productivity gains, muted labour force growth and high indebtedness remains in place.
Western government bonds have become cheaper compared to a few months ago, but they are still expensive in our view. Within developed bond markets, the US and Canada look now somewhat more attractive, the same is the case for France and Italy.
Hartwig Kos is deputy-CIO and co-head of multi-asset at SYZ Asset Management
Markets pricing reflation trade to perfection
Markets seem to be pricing Trump’s reflation agenda to perfection. What markets have ignored so far is how a higher budget deficit, increasing financing costs and weaker demographics could impact long term growth expectations. This means that there is more room for negative surprises than the other way around. Outside the US, political risks are also high – especially in Europe where several important elections in core European countries could trigger other bouts of volatility.
Earlier this month, the overall duration of our Flexible Fixed Income Fund increased from 3.1 years to 3.7 years. This change was motivated by rising yields, which suggests duration has become more attractive, both in terms of expected return and potential downside protection. The majority of the Flexible Fixed Income Fund duration exposure relates to 10-year issues from the UK, US, Canada and Australia, as well as short positions in German bunds.
Karsten Bierre is lead portfolio manager of the Nordea 1 – Flexible Fixed Income Fund
We need more evidence before becoming bearish
Recent updates from major central banks suggest global accommodative monetary policy bias remains in place, despite the recent upturn in leading economic growth and inflation indicators. The Fed still aims to raise rates three times in 2017, but should remain cautious in doing so in our view without much stronger evidence the new Trump administration is gaining traction with its pro-growth fiscal policies.
We are cautious on anticipating significant further US treasury weakness from the more elevated yield levels reached of late. As we have found in recent years, expectations and reality have often diverged significantly in government bond yields. We will need to see considerable further evidence to the contrary to become bearish more generally on government bonds. We look to still buy US treasuries on weakness, with TIPS in particular attractive as a core holding near term.
Craig Veysey is manager of the Sanlam Strategic Bond Fund
Trump arrival has fundamentally altered landscape
Given expectations of greater fiscal stimulus and a more activist approach to economic policymaking, we believe Trump’s victory heralds a fundamentally changed investment environment, one in which we envision more volatility and a higher risk premia for assets. Inflation and growth expectations along with risk premia – the three primary components of treasury yields – have all increased. US treasury yields have already risen steeply and may have further to go as president Donald Trump’s policies become reality. That said, the gravitational pull of the global rate structure, marked by accommodative policy in Europe and Japan, persists and could keep a lid on US rates.
Our Global Bond Absolute Return Fund continues to have negative headline duration as we continue to see more opportunities in the reflationary stories across developed markets. Historically low sovereign bond yields faced by investors today cannot be sustained indefinitely amidst improved economic outlook, rising inflation and continuously improving labour market situation.
Jon Jonsson, is manager of the Neuberger Berman Global Bond Absolute Return Fund