Nordic fund selectors are warming towards developed market government bonds and plan to increase their holdings of the asset class over the next year, according to Last Word Research.
The data suggests investor attitude towards the asset class, which has been shunned in recent years because of weak returns, may be starting to change as QE programmes come to an end and rates rise and point to developed market goverment bonds receiving more positive inflows over the next year.
The yield on benchmark 10-year US Treasuries hit 3% last month.
Last Word Research found that 18% more Nordic fund selectors in Q1’18 said they planned to increase their holdings over the year to March 2019 compared to their sentiment in Q4’17.
While this was the largest positive shift in sentiment for Nordic selectors, across 22 asset classes, the sector is now in low neutral territory in terms of sentiment.
Investors sold off developed market government bonds en-masse in the aftermath of the global financial crisis and have shown limited interest in the asset class in the subsequent decade amid ultra-low interest rates.
European sentiment towards the asset class has been consistently negative since Last Word Research began polling fund selectors in 2012.
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Source: Last Word Research
For the Nordics, 16% of fund selectors intend to buy developed market government debt over the year to March 2019, 35% intend to hold, 19% to sell, and 31% do not use the asset class.
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Source: Last Word Research
Nordic fund selectors were noticeably more positive on the asset class than general pan-European sentiment (where 11.9% wanted to buy, 24.8% intended to hold, 39.6% planned to decrease, and 23.8% did not use it.)
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Source: Last Word Research
Changing global backdrop
Many investors, nonetheless, remain cautious on developed market government debt.
Brooks MacDonald investment director Edward Park said: “Whilst developed market bonds are starting to look potentially more attractive the overall global backdrop for bonds is negative”, adding that robust global growth forecasts make many asset classes a lot more attractive investment propositions than low-yielding safe-haven developed government debt.
“If you believe growth in the UK and eurozone will have a sustained slowdown then there might be an argument to buy them,” he said.
Park said the UK government bonds were the most attractive of all the developed market government bonds but said investors should still be underweight in the asset class.
“On a 10-year UK gilt you’re getting yields of 1.38% which is unexciting on an absolute basis and not necessarily enough to tempt investors to buy it,” he said. “On a 10-year German bund you’re getting just 0.54%.”
Park said despite the rise in 10-year US treasury yields to around 3% he did not expect yields on the asset class to continue to rise to make it an investment proposition anytime soon, adding that US dollar-euro hedging costs were squeezing yields for eurozone investors.
