He says the economy is at the “early stage” of the economic cycle, which implies that the recession is relatively far into the future, and that short-duration assets are the appropriate ones to own.
Guy Miller, chief market strategist at Zurich, says he believes inflation will moderate later this year, and this should mean a recession does not happen for quite some time.
If he is correct, shorter-duration bonds will perform best.
Supply shock
Nicholas Forest, fixed income fund manager at Candriam, says that while the developed world entered and exited the pandemic-induced recession at broadly the same time, he believes the focus of the next stage of the recovery will see countries' economic performance diverge, and that will lead to different bonds performing in different ways.
He says: “The key is that as QE comes to an end, the supply of bonds will continue, but the demand for those bonds will be lower as the central banks, who have been big buyers, exit the market. But I think this will lead to a repricing, rather than a collapse in prices.”
Forest says he does not believe that a recession is imminent, but adds that if it is, “the asset I would like to own is the 30-year US government bond”.
Ben Lord, bond fund manager at M&G, says the “data will determine” whether short or long duration is the correct course right now, but he points out that the Bank of England’s own forecast is for inflation to be much lower in three years than it is now.
He also questions whether the BoE has taken into consideration that present government policy in the UK is to reduce government spending, which would be expected to reduce inflation, and he wonders if this has been factored into the BoE’s present interest rate policy.
If he is correct, long-duration government bonds would likely perform best.
Lord adds: “It shows how much has changed globally that in June 2021, a majority of the [US Federal Reserve] committee were of the opinion that there would be no interest rate rises needed until 2024, then it was 2023, and now it is this year.
"That journey has been nothing short of remarkable. In the US market it is a very tough period to be a bond investor there, because while everyone understands that rates will rise, it hasn’t happened yet, and the central bank is still buying bonds, so it’s hard to price assets.”
Risk rated
Government bonds are generally viewed as the lowest-risk asset class, and tend to sell off substantially when interest rates are rising and investors are confident enough in the economic outlook to want to own riskier assets.
