Global bond markets are performing well on the back of poor equity performance, with Europe offering...
Global bond markets are performing well on the back of poor equity performance, with Europe offering investors better opportunities than the US.
According to John McNeill, investment manager, fixed interest at Britannic, the main factor currently affecting bonds is the poor performance of equity markets.
Another factor driving the bond market has been a significant shift in interest rate expectations. The feeling was that short-term interest rates would have risen by now, he says.
However, should equities stabilise, he warns, bond markets will not be so compelling.
McNeill says: 'We are only at these high yield levels because equities have been performing poorly.'
One major sector likely to impact on bonds is life assurance companies, McNeill notes.
'Questions are being asked about the solvency of their funds and the sector is coming under increasing scrutiny,' he says. 'The question is whether they will switch from equities to bonds.'
European bonds have been performing particularly well, McNeill adds. 'The European sector is more attractive than the US bond market at present and has also outperformed the rest of the world over the past three months,' he says.
McNeill is slightly overweight European government bonds relative to US Treasuries and is fairly neutral on the rest of the world.
This position comes simply because yields within Europe are higher. He points to Germany, where 10-year government bond yields sit at 4.83%, 33 basis points above US government bonds, at 4.5%.
The fact the euro has appreciated 11% against the dollar since the start of the year, enabling takings from currency translations, has also made bonds within the eurozone attractive, he says.
Ashley Goldblatt, head of fixed interest at Axa Investment Managers, agrees European bonds look more attractive than their US counterparts.
'We favour Europe over other regions and particularly like Sweden,' he says.
The Swedes will probably soon vote on entry to the euro. This, Goldblatt says, will end with Sweden joining the euro as the image of the single currency has improved and the arguments for remaining outside it are not as strong as in the past.
Within the eurozone, long-term corporate yields look attractive and Goldblatt favours the region over the UK.
However, he is slightly bearish on some European government bonds and says most of his portfolio is short on duration as he believes this is where the best value is to be found at present.
The future outlook for European bonds will be affected by central banks looking to help equity performance and not wanting to put up interest rates, he adds.
'If we don't see a recovery that will impact on tax revenues, this might force governments to issue more debt than planned,' says Goldblatt. 'Our view is that bonds within Europe are more likely to rise than fall. One of the plays we've made has been to sell long-dated sterling bonds, buy long-dated euro bonds and hedge out the currency exposure.'
Poor equity means value found in bonds.
Central banks will try to hold down rates.
Value to be found in eurozone.