Investors who own too many bonds with long duration could lose out if the interest rate falls which bond markets are pricing in fail to materialise, according to Christian Hantel, senior fixed income portfolio manager at Vontobel.
Hantel told FTAdviser that, despite inflation being quite high, investors were buying longer duration bonds in anticipation of a “pivot” from central banks in Europe and the UK but, with inflation proving to be more persistent than many had expected, it may be the pivot is delayed.
This, he said, meant there could be a "very quick correction" which would hit those who own longer duration bonds.
When investors anticipate that interest rates will rise, they buy bonds with a short-date to maturity both because the price should be less sensitive to changes in interest rates, but also because the shorter date to maturity reduces the risk that the company which issued the bond will be unable to pay a result of the changed economic conditions which may be the result of the higher rate environment.
Conversely, if the market believes that rates will soon fall as a result of declining inflation, then the temptation is to buy bonds with a longer maturity to lock in the higher yields.
But Craig Veysey, a portfolio manager at Man GLG, said the rationale for owning long-dated bonds remained intact, as the current policy of the Bank of England would “inevitably” lead to a recession which would push inflation downwards and cause the price of long dated bonds to rise.
He said: “With rates now being in much more restrictive territory it will be incumbent on the economic data, particularly core inflation and wages, to begin to respond to the strong medicine being applied by the Bank of England.
"Our view is that a recession in the UK is unfortunately inevitable, probably at the turn of the year, and finally this will see a rates peak come into view for gilts investors in the next few months.
"Many investors will see long maturity gilts as particularly attractive at this point versus other major economy developed market bond yields; they are likely to be useful for a negative growth/lower inflationary environment, with a longer term view in mind.”
But a recession may well arrive with inflation remaining above the Bank of England’s target, with the result that rates would rise, even if recession was taking place.
Michael Siviter, senior portfolio manager for fixed income at Invesco, was more optimistic.
He said that while inflation was proving stickier in the UK than many had expected, many of the indicators of future inflation were already indicating the peak may be near, and on that basis he regards UK government bonds at their present price as being an attractive investment.
david.thorpe@ft.com
