The European fixed income market is facing systemic risks as the European Central Bank (ECB) prepares to unwind its quantitative easing (QE) programme, according to managers.
The manager said: "With the bull market in bonds, investors have not taken any pain. We do not know how investors will react when they start to see underperformance in their safe-haven assets and how unruly it could become. This is why we continue to avoid holding fixed income in Europe."
ECB QE 'tapering' prompts sharp rise in European bond yields
De Bunsen said rising inflation in Europe could force the ECB to tighten monetary policy later in the year.
"The biggest issue this year in Europe, provided there are no big political shocks, is the fact the ECB has to start tapering QE in the second half," he said.
"They will be under pressure to keep being accommodative, but inflation is picking up and it is entirely inappropriate to have interest rates where they are in places like Germany."
Oil price pressure
Inflation in the eurozone accelerated to 2% in February, slightly above the ECB's target, due to the sharp rise in oil prices.
Hani Redha, global multi-asset manager at PineBridge Investments, suggests the market has not fully priced in this risk, with investors set to suffer losses from bond holdings as inflation rises; German 2-year and 10-year bunds currently yield -0.9% and 0.3%, respectively.
He said: "The starting point for European credit markets, very low yields and spreads, makes these markets particularly vulnerable to any tapering by the ECB. The market is not fully pricing this in, so further negative returns would be in store."
