ETPs: is 2018 the end of the bond bull market?

Vasiliki Pachatouridi, Product Strategist in BlackRock’s fixed income portfolio management group, discusses the outlook for bonds in 2018 with IGTV’s Victoria Scholar.

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Is 2018 the end of the bond bull market? 

Investor appetite for fixed income assets kept bond prices supported and yields suppressed in 2017. Ratings agency, Morningstar, called it ‘the year of the bond fund’. That followed on from 2016 when central banks’ monetary stimulus programmes around the world drove bond yields to record low levels.

Many analysts are now concerned that 2018 could mark an inflexion point for the bond market’s 30-year bull stretch. The so-called ‘Bond King’, Bill Gross, of Janus Henderson, declared that we are entering a bear market for bonds. We are seeing ten-year treasury yields scaling multi-year highs, while the German five-year bund yield rose above zero for the first time since 2015.

BlackRock’s Product Strategist, Vasiliki Pachatouridi, says she thinks this is a simplistic view, where rising rates are often paraphrased as the end of the bull market for bonds. In reality, she says, investors need balanced portfolios, and the question is not whether to own bonds, but rather how to own bonds. Pachatouridi says that rising rates could mean a rotation back into fixed income, as higher yields improve the relative attractiveness of bonds versus equities.

In terms of inflation, Pachatouridi says her team is expecting a modest comeback for prices driven by the US, which should see three to four rate hikes from the Federal Reserve (Fed) in 2018. But what will the European Central Bank (ECB) do in terms of policy normalisation, and how will policy shift at the Bank of Japan (BoJ)?

Looking at investment ideas for 2018, Pachatouridi says bonds are an important part of any portfolio as a diversifier. She expects inflation-linked exchange traded fund (ETF) securities or US floating rate bonds to outperform their nominal equivalents.

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