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Concerns over ‘bond bubble’ as overvaluation perceptions grow

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The CFA UK has raised concerns of a developed market bond bubble following a survey of its members based on Q3 valuation perceptions.

Eighty two per cent of members surveyed considered developed market government bonds to be overvalued and 78 per cent considered developed market corporate bonds to be overvalued.

At the start of the year 67 per cent held this view about government bonds and 58 per cent felt this about corporate bonds.

The survey, which covered 354 investors and analysts, was based on government bonds yielding 0.75 per cent as per the JP Morgan Global Government Bond index on 8 July.

The survey’s corporate bond benchmark was yielding 1.55 per cent during questioning.

In developed market equities 67 per cent viewing the asset class as overvalued, compared with 40 per cent at the beginning of the year. It is the highest this perception has been since the CFA UK began the UK Valuations Index in 2012.

Only 10 per cent of respondents viewed developed market equities as undervalued.

Will Goodhart chief executive of CFA UK says: “The impact of Brexit and concerns around the US election result may be weighing on the minds of investors as the proportion of our respondents viewing developed markets equities as overvalued hit record highs.

“Similarly, fears of a bond bubble appear to be growing. The broad perception that valuations are now at extreme levels indicates that market values are more than usually vulnerable to rapid and significant change.”

This week 10-year government gilts pipped 1 per cent, having risen from 0.74 per cent last week in a move attributed to overseas investors dumping UK assets as sterling continues to fall.

While development market assets were regarded as overvalued, 42 per cent of respondents thought emerging market equities were undervalued. Thirty per cent thought gold was overvalued, down from 39 per cent in Q2.

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