Slowing growth in the U.S. together with the largest annual gain in the consumer price index since 2008 have raised concerns about stagflation, which would pummel both bonds and stocks. Citigroup indexes show global inflation expectations are beating expectations by a record, while a similar gauge of growth has dropped in all but one of the past 18 weeks.
Not everyone is bearish on the outlook for fixed-income assets.
Bond yields may rise in coming months but they are likely to fall back again due to weak growth and concern about high government debt levels, according to Capitulum Asset Management GmbH.
“If rates spike between now and year-end, you have to buy the dip on bonds,” said Lutz Roehmeyer, chief investment officer at the Berlin-based money manager. “We will have to live with easy monetary policy for the long term and this keeps me very confident that rates will not rise too high.”
It’s actually a “perfect environment for active bond managers,” said Roehmeyer, whose local-currency and hard-currency emerging-market funds have returned 5% to 6% this year, according to data compiled by Bloomberg.
Chinese government bonds have returned 5.5% in 2021 amid speculation slowing growth in the world’s second-biggest economy will spur the central bank to ease policy further. High-yield corporate debt has also outperformed, cushioned by their generous coupons, with securities in the U.S. making 4.3% this year.
Fixed-Income Total-Return Forecasts
The challenging environment for global bonds means money managers will struggle to deliver positive returns unless they add off-benchmark risk or focus exposure in less-liquid markets, Bloomberg Intelligence’s Sassower said.
“You have to be far more selective, far more nimble, far more flexible and you have to open up your policy constraints to allow yourself to invest in off-benchmark securities where you can get higher yield, with perhaps mis-priced risk,” he said. Just buying a global aggregate bond index for positive returns is “not going to cut it any longer.”
—With assistance from Hema Parmar.
This article was provided by Bloomberg News.