Bonds remain a crucial asset for any investor building a yield-generating portfolio, despite yields having failed to rise in line with expectations.
So says Chris Iggo (pictured above), AXA Investment Management’s chief investment officer for global fixed income, who adds that the approximate level and direction of change of bond yields over time is related to long-term economic growth rates, which go a long way to explaining why bond yields remain low today.
He goes on to say that the improved macro trend of the last year suggests a bottoming out in the rate of nominal GDP growth and the consequent bottoming of bond yields. But, Iggo warns against expectations of a massive rise in bond yields.
“The consensus view is that yields are too low and that the tendency should be for them to rise, but by how much and driven by what? Sure, short-term considerations about synchronised global growth, the potential for fiscal stimulus in the US, the Fed’s tightening plans and higher headline inflation all point to higher yields.
“However, if the longer-term trend is not towards higher rates of nominal growth, then the extent to which yields will rise is likely to be limited.”
The key, believes Iggo, is that investors should think instead about what fixed income markets can offer investors today, in terms of helping prepare for tomorrow: ‘That is, as always, capital preservation, a source of income, total return opportunities and diversification against the promises of equity-driven growth. Bonds can be an investor’s best friend,’ he says.
And, he has six golden rules of investing for yield.
To find out what these are, read more.