Schroders head of global fixed income Nick Gartside believes that a storm is brewing for government bonds and has warned investors to sell out of them.
At the Schroders London investment conference at the Mayfair Hotel last week, Gartside said gilts should be a risk-free return but have become a return-free risk.
He said: “They offer very limited value. If we use consensus estimates of real growth and inflation over the next five to 10 years on where a 10-year bond yield should be, in all cases yields are expensive by 0.5 to 1.5 per cent.
“If you own government bonds, get rid of them. There is a storm brewing with higher inflation and higher interest rates and you will lose money on them.”
Chief investment officer Alan Brown added: “We know supply is going to go through the roof. At some point, interest rates will normalise, meaning government bond yields are going to rise rapidly. That is the next bubble, even if it will not burst for some time.”
Gartside said inflation-linked bonds are likely to outperform nominal government bonds over the next 10 years with higher inflation.
Skerritt Consultants head of investments Andrew Merricks says: “Fears over government bonds in the short term is probably being overdone. There appears to be a support mechanism, with banks being forced to buy them for liquidity purposes.
“In the long term, there is almost certainly a threat but that could be a couple of years away yet.”