Valuations across the bond market are looking expensive. The relationship between duration and yield is stretched to the extreme.
For us, the rewards on offer in most areas of the market are not high enough to compensate fully for volatility risk, especially in longer maturities.
If growth is slowing globally, this does not look factored into credit spreads. Even with further stimulus in Europe, growth disappointments could negatively impact spreads and lead to underperformance against government bonds.
A big portion of high quality European credit is trading at negative yields. While paying a sovereign to ensure principal return can be understood, doing the same with corporate credit is a very different proposition given companies cannot print money and are much more likely to default.
Accepting a negative yield from a corporate makes no sense unless you are hoping for a capital gain from yields turning more negative.
This is a strong reason to stay in shorter-dated, lower duration bonds, which typically have significantly lower capital risks.
One of the more attractive places to do this is in sterling credit, because the market has offered a spread premium to other developed credit markets since the 2016 Brexit referendum.
Even today, we see spreads in investment grade significantly higher than in euros or dollars, often for exactly the same companies.
Those too wary of Brexit risk who avoided this part of the market will have missed out on some of our favourite bonds, which have paid an attractive coupon and matured at par within the past three years.
Short-dated sterling bondholders can also benefit from some of the highest breakeven yields to be found anywhere at the moment.
Bonds with a high breakeven yield are often attractive because they should provide investors with some protection against the risks of a rising yield environment - and in investment grade credit, the best breakeven yields we have seen are in sterling.
Short-dated, low duration bonds should minimise capital risks from Brexit, and for investors who want to remain in the highest quality government bonds, the UK is one of the few European sovereigns with positive sovereign yields today.
Chris Bowie is partner and portfolio manager at TwentyFour Asset Management
• Shorter-dated sterling bonds offer some of the highest breakeven yields to be found anywhere in fixed income
• High breakeven bonds should offer some protection against the risk of rising yields
• While yields are at historic lows, central banks appear desperate to engineer an extension of the cycle
• Negative yields in corporate credit present the sort of asymmetric risk that is not an attractive use of capital