View more on these topics

Proceed with caution

A bond bubble looks unlikely but avoid exposing investors to undue risk

There is no doubt that global markets have provided some inclement conditions. To date, 2010 has been a challenging investment environment, characterised by many conflicting signals as to whether the global economic recovery has begun to take root or not.

The enormous stimulus provided by the authorities in 2009 helped lead to signs of a recovery in 2009 and early 2010, causing riskier assets to rally sharply. However, this was interrupted when the European sovereign debt crisis started to hit in March.

Recent press coverage has led to discussion about the emergence of a bond bubble – but there are flaws in this argument.

We do not deny that certain areas of the market may be a little overvalued at present but we maintain that inflationary pressures in Europe and the US are likely to abate, especially given the backdrop of high unemployment and low growth.

Taking such considerations into account, we believe that bonds start to look much less overvalued.

All in all, therefore, we would argue that talk of a bond bubble is nonsense when you consider their intrinsic value. That said, our tendency at the moment is to be relatively cautious as we want to avoid exposing investors in the fund to undue credit risks.

Due to renewed risk aversion in the markets, the most significant change to the portfolio in recent months has been at sector allocation level.
At the end of 2009, we were overweight high-yield credit and emerging market debt. As market volatility increased we began to reduce our risk exposure, meaning that by the end of the second quarter of 2010 we had a roughly neutral exposure to corporate bonds.

The fund’s emerging markets debt exposure has been reduced and, as elsewhere, holdings in this area reflect the team’s broad preference for higher-quality sovereign issues. The fund therefore maintains exposure to Brazilian bonds, while an earlier position in Hungarian government debt was cut before yields subsequently spiked.

Furthermore, consistent with the decision to reduce the overall level of risk in the fund, within the credit portion, exposure is pretty well diversified between issuers and sectors.

Specifically, the fund does not own any tier-one bank bonds, as previous holdings were sold as part of the risk-reduction effort. Our preferred credit holdings within the financial sector include issues by BNP Paribas, Société Générale, Citigroup, Barclays and JP Morgan – so, predominantly well capitalised, global banks.

Our low exposure to peripheral sovereign bond markets was a significant boon for relative performance in the period following the Greek debt crisis.

The fund’s allocations in this area have been fairly flexible and overweight positions in Spanish and Italian government bonds (subsequently reduced and sold, respectively) during the risk rally in July 2010 were, in fact, strongly beneficial to returns.

We have studiously avoided Portuguese and Irish debt as these are smaller economies with big problems.

Conversely, it should be emphasised that we do not have significant concerns about the sovereign creditworthiness of Spain or Italy and these bonds offer an attractive opportunity to pick up extra yield over German bunds.

We believe these spreads are probably higher than they really should be. Ultimately, this will depend on individuals’ assessments of the credit risks posed by these bonds.

David Leduc is manager of the BNY Mellon global strategic bond fund



Marlene Shalton

The new president of the Institute of Financial Planning describes how she uses skills gained as a probation officer to gain a person’s trust and understand their financial needs Interview by Lee Jones


Is Basel faulty?

Mortgage experts are divided over how the new capital and liquidity requirements decided by the Basel Committee will affect mortgage lending. The committee has developed the rules with the aim of ensuring banks have sufficient capital to weather any downturns without taxpayer support. Banks will be required to hold a minimum core tier one capital […]


Straight down the line

When interest rates collapsed, Sipp providers lost a major income source from the margin they retained by paying less than the going rate for cash deposits held in their plans. They all rushed to raise their fees to compensate, just as Axa raised the issue of the price of wrappers falling to zero. I realise […]

Mark Page: “A good time to be a European fund manager”

With European markets picking up in early 2015, Mark Page, Artemis European Opportunities Fund manager, discusses the ‘macro’ drivers and whether the improvements are sustainable. Largely driven by economic stimulus by the European Central Bank, European stockmarkets have performed strongly so far in 2015. Mark discusses the relative merits and sustainability of ECB policy with […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm