However, recent volatility as a result of the Italian elections, leading to a further rally in bond markets, demonstrates the situation is far from clear-cut. Key fundamentals suggest the bond market may even strengthen this year, particularly if problems in the eurozone or US re-emerge.
“Currently central banks are continuing to pump money into the financial system. This will lead to increased activity, for now at least, albeit with the inevitable side-effect of increased currency volatility,” states Legal & General Investment Management’s credit strategist Ben Bennett. “Second, many companies are sitting on tidy cash piles that may this year lead to increasing investment dividends and M&A activity, indeed this is something we’re already starting to see.”
In addition, bonds continue to play a pivotal role in portfolio construction, particularly for those investors looking for an income stream. As Roger Webb, co-manager of the Swip Strategic Bond fund, says: “We can’t ignore the fact that there is still a lot of money coming into bonds and there is still a need for income that naturally leads investors to bonds. Added to that is the requirement for pension funds to have a weighting in bond assets, which is something that isn’t going to be reversed for the foreseeable future. So, while we are in an environment where yields could rise slightly, it is not likely to be the sharp correction a lot of people are expecting.”
