Bond market risks could derail equity bull run - Barings

Barings’ Percival Stanion remains cautious on equity valuations believing the risks to the bond market could derail the current bull run.

Head of asset allocation Stanion says 2010 will be a "huge" year for bond issuance, and this time quantitative easing will not be in place to mop up the excess.

As a result, private buyers will have to be found in record numbers, which may well lead to bond yields rising in the US and UK, he warns.

"A modest rise in bond yields could be tolerated by equity markets, but a large rise in yields, or a disruption in the auction process, would spook investors and undermine valuations," Stanion says.

"On balance, we do not see this as a major threat, as on every previous occasion when we have fretted over issuance in the last 30 years we have actually seen very healthy private-sector demand.

"Almost certainly this is because it occurs at a time of very subdued private sector credit creation, so government paper is the only option. This cycle promises to be no different."

Stanion's other concern is the risk of equity valuations being undermined by profit downgrades.

"This needs careful monitoring as there are genuine worries about the health of real final demand and margin expectations are at record levels," he says.