Investors should swerve longer-dated bonds in favour of those set to mature in, say, the next five years, according to Bethany Payne (pictured), portfolio manager, global bonds and Jim Cielinski, global head of fixed income at Janus Henderson.
In the latest Janus Henderson Sovereign Debt Index, they said the case for shorter-dated bonds was more compelling as, against a backdrop of rising interest rates, “their prices are less volatile because they are certain to repay their capital quite soon, making them less susceptible to changing market conditions”.
Payne and Cielinski are also sceptical about the number of interest rate rises that will materialise this year. The US currently has up to seven pencilled in. “This means shorter-dated bonds will benefit if the tightening cycle ends sooner.”
The case for fixed income
Given their respective roles, it’s not surprising that Payne and Cielinski are quick to acknowledge, “when inflation and interest rates are rising, it is easy to dismiss fixed income as an asset class, particularly since bond valuations are relatively high by long-term historical standards”.
They argued that, with investors having become very overweight equities in recent years, “selling the riskier asset and switching to a lower risk alternative is the best way to diversify”.
“Higher inflation and expectations of rising interest rates have now been largely priced in by bond markets. Bond yields have risen in recent months, meaning that new investors receive more interest income for each dollar they invest.
“And since yields move in the opposite direction to prices, that means prices are lower and bonds are now much better value.”
Payne and Cielinski also downplayed concerns that the end of quantitative easing is bad for bonds. “The reduction in central-bank demand for bonds is coming at a time of much less new borrowing by governments as economies recover – so supply of bonds is falling too, helping offset the drop in demand.”