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rethink fixed income

While calls for the death of the bond bull market may have receded, return expectations have changed, as have the types of products being created.


And, if anything, served to further challenge expectations about the bond market and what to expect from it in 2015. While there remain many that believe yields will stop falling, at least within developed markets this year, fewer are prepared to call time on the bull run.
But, there is an increasing realisation that, even if bond yields can fall further from here, the returns look increasingly anaemic – and investors should be prepared for that.
And, in order to do so, new products are continuing to come on stream, that aim to take advantage of the expectation that markets, and in particular, bond markets, have changed significantly.

New Products

This was underlined yesterday, by comments made by two fund groups, who launched funds aimed at providing income that traditionally would have been sourced directly from bond markets.
Jeremy Roberts, Head of UK Retail Sales at BlackRock, said by way of explanation for the rebranding of its balanced income fund to a global multi-asset income fund that: “Finding and receiving income from mainstream sources is becoming increasingly difficult.
He added: “Traditional bonds are being challenged by the perpetual search for yield, we’re seeing historic lows for interest rates on cash and while equities can produce an income, there is more volatility in a single asset class.”
Jim Cielinski, head of fixed income at Threadneedle Investments, meanwhile, said yesterday at the launch of a new bond fund: “The fixed income world is changing and the characteristics that once defined fixed income asset classes are becoming obsolete – witness the near-zero yields in some high-quality bonds. We believe that these developments represent a structural shift in fixed income markets.
It is clear the market is looking for ways to continue to provide investors with the levels of income to which it has become accustomed and continues to provide products that it believes will do the job. The real question is, can such products provide that income with the same level of risk as was previously the case?
Nick Gartside, international CIO for global fixed income, currencies and commodities at JP Morgan agrees that the market has undergone some structural change, but said that calls for the death of the bond bull market are overstated, especially when one considers that within the bull run there have been periods of pronounced underperformance, for example 2013.
“The challenge this time is that the starting point is so different, you have structurally lower levels of inflation and growth, but, terminal rates are also lower. Rises in bond yields can be accommodated, but returns from bonds are going to be lower going forward even in positive years,” he said.
Ben Foster, head of research at Brewin Dolphin told Portfolio Adviser, that the group has reduced its fixed income exposure, looking instead at alternatives like equity absolute return, in recent months.
“Fixed income is a market that offers good diversification to equities still,” he said, “but as a stand-alone asset class, it doesn’t offer a lot of yield at the moment.

‘Be cautious’

While, Bill Gross, writing last week in his investment view for January, Janus Capital’s Bill Gross, said: “Be cautious and content with low positive returns in 2015. The time for risk taking has passed.”
Exactly how bond markets are going to behave in 2015 is anyone’s guess. There are going to be pockets of outperformance and underperformance, and just like every other year, some investors will lose money and others will make some. But, what is clear is that expectations of what a reasonable return are should perhaps be revised.