He says: “The lower for longer period has helped turn fixed income into one of the more attractive asset classes this year, not only for diversification purposes in an multi-asset portfolio, but also in terms of returns.
“However, although the global policy backdrop shows no signs of changing materially in the near future, there is enough talk of different policy directions for investors to understand that bonds will not stay at their current elevated levels forever.
“Eventually, if central bank measures prove to be successful, global growth and inflation will pick up, which is likely to drive yields higher. On the other hand, growth could slow down and credit could sell off, or we may see a renewed sovereign crisis, which would drive credit spreads wider.”
Recent wobbles in the bond market, which saw yields rise and spreads widen due to investor jitters, were, says Iggo, a reminder of just how dependant markets and valuations are on extraordinary central bank policies.
“Ultimately, markets will need to find a new equilibrium in a post-Quantitative Easing (QE) world when, presumably growth and inflation are at more comfortable levels. And we are likely to see higher volatility as a result of the return to normality.”
For now at least any “return to normality” seems far off, and while asset allocators ponder over the next big move, it is always worth remembering that the most unloved asset classes are those that often deliver the biggest surprises.
