Artemis' Foster: Sword of Damocles hangs over the bond market

ON BONDS

The end of the holiday season could prompt a tumultuous time for bond markets, says James Foster, manager of the Artemis Strategic Bond fund.

Government bond prices should be driven by one thing: the outlook for inflation. Of course, lots of other things have a bearing, but if inflation is low, bonds should do well and vice versa. However, with UK inflation (CPI) running at 2.6% in the last year, why are 10-year UK government bonds yielding a pathetic 1.6% when, after all, inflation is 1% higher? If we look at Germany, the numbers are even more extreme with two-year yields at zero while inflation is running at 1.7%. A negative return from any asset class seems madness. The reason is that investors are running scared, aided ...