Client director Simon Bullock is warning low-risk investors against coming out of cash due to low interest rates and blindly piling into government bonds in search of better yields.
Bullock says: “If you are going beyond 10 per cent in gilts and US treasuries, you are overweighting in risk. We are turning bearish on gilts. We are still including them in portfolios but will look to reduce exposure as client reviews come up from now on.”
Speaking at a Fidelity Fundsnetwork investment forum last week, BNY Mellon Asset Management head of fixed income Paul Brain argued the case for US government bonds and high-quality investment-grade corporate bonds, with the latter pricing in Armageddon.
He said: “Unless risk assets are able to rally very strongly, the only port of call for the time being is the government bond market. For the next 12 months at least, the environment is set fair for a decline in government bond yields.
“We believe the only next step for US authorities is quantitative easing through the purchase of treasuries. If the market is worried at all about the amount of supply, the central bank has to step in and use internal balance sheets to buy government securities.”
Bullock says: “We think the yields could fall a bit further but on a 12-month view look vulnerable. Six months ago, we were a lot more positive on them than now. There is a lot of danger and there could be a snap-back, be it from issuance or a switch from fear to greed or a bit of both. They maybe have a few more months but it is a dangerous game to be playing for too long.”