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Forty-year bond bull market far from over, says AXA Investment Managers

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The 40-year bull market in bonds is far from over despite predictions of its demise, according to Nick Hayes, manager of AXA IM’s Global Strategic Bond strategy. 

The 40-year bull market in bonds is far from over despite predictions of its demise, according to Nick Hayes, manager of AXA IM’s Global Strategic Bond strategy. 

Hayes says that the current environment – with inflation high, economic growth strong and recoveries well underway – should be a significant headwind for fixed income markets. But he argues that, with more structural buyers than sellers, bonds are likely to continue to surpass expectations from a total return perspective, something he argues they have been doing for more than a decade. 
 
“On one hand, the macro picture should be massively negative for bonds, and we did see a fairly short-lived downturn earlier this year,” he says. “But the market rallied back over Q2 and Q3 because central banks have been tolerant of inflation, believing it to be transitory despite the ambiguous associated timeframe, and because there have been huge price insensitive buyers in the government bond market driving yields down.” 
 
Hayes says heavy government debt buying has come not only from central banks but also from insurance companies, pension funds and big banks, which have been investing large deposit bases in sovereign bonds for regulatory and balance sheet reasons. 
 
“This has created a dynamic where theoretically bond yields should be higher but, for positive technical reasons we believe will persist, they are not,” he says. “Everyone is talking about central bank tapering but we expect central banks to remain accommodative for as long as it takes to keep the recovery moving, even if that means gradual reductions in emergency asset purchasing programmes. Although market reaction is creating some spikes in volatility, yields remain low and still well below pre-pandemic levels. Hawkish, for us, is not tapering on its own, which we think is priced in. Rather, the Fed has been at pains to emphasise a distinction between tapering and interest rate rises, which we do not see happening in a sustained manner for some time to come yet.” 
 
With yields likely to remain low, Hayes says the team still sees a place for duration in the strategic bond portfolio, focused in US treasuries – the highest nominal yielding high quality sovereign debt – although exposure was recently trimmed from four years to two years to deal with short-term volatility. 
 
“There are so many investors underweight bonds and duration that it provides a positive contrary tailwind,” says Hayes. “We know duration is expensive but as investors you just can’t rule out government bonds. People think they’re incredibly dull, that they have no yield and you can’t make any money out of them – that is not true. There are hugely positive reasons to own government bonds, including attractive liquidity and diversification characteristics, and we like to use them as an engine and performance driver in the fund.” 
 
In terms of credit, Hayes says valuations remain expensive after a long rally but considers pockets of the US High Yield and UK and European credit markets to be attractive. “We have a preference for lower quality investment grade credit over higher quality, and we see value in select subordinated financials with more attractive spreads and where we have a strong fundamental opinion.” 
 
In US High Yield, the team is finding short-dated, high carry opportunities further down the rating spectrum, although they are underweight energy. “Vanilla passive funds must have a large exposure to energy as it such as big part of the US High Yield market, but as an ESG integrated strategy we prefer to be underweight that sector and instead do a lot of fundamental credit work to find attractive alternatives in the single B and CCC space, where average yields are 4-6 per cent. That, for us, is another good way to make money out of an asset class some people seem to think has run out of return-seeking options.” 

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