A growing number of investment pros are fretting that bonds are sky-high and the sector could collapse, according to a new survey of global bond managers.
Nearly 80 percent of global bond fund managers surveyed by the CFA Society of the United Kingdom
said bonds are more overvalued than ever before and that government bonds are the most overvalued asset class of all.
"QE [quantitative easing] has supported increases in asset values by depressing the rate at which future cash flows are discounted and by encouraging growth thereby improving the outlook for earnings," said Will Goodhart, chief executive of CFA UK. "Our most recent survey’s results suggest that investment professionals feel that the prospects for additional benefits from QE may be limited. The overall picture suggests that investment professionals see the search for returns as becoming even more challenging."
John Stopford, head of multi-assets at Investec, told the Financial Times
a drop in the value of fixed-income assets could be chaotic. "If we do see a reverse in the market, there could be price dislocation and a messy unwind," he declared.
Because investors have endured low interest rates for six years and QE they have piled into investment-grade, high-yield and emerging market bonds in search of yield.
"As a result investment managers fear that bond markets could seize up
if falling prices or a financial crisis prompt investors to pull their money out of bond funds. Without the banks to act as backstops, there may not be enough institutions prepared to buy bonds when the funds have to sell," the Times, which described the current bond landscape as a "fixed-income bubble."
"You only know you're in a bubble when it pops. But this market could pop. There is more tension and anxiety over valuations than for a long while," Brad Crombie, head of fixed income at Aberdeen Asset Management
, told the Times.
However, the newspaper said fears of a bond market meltdown are not universal. To be sure, asset management giants BlackRock, Vanguard and Pimco believe the bond market stands to benefit from a growing economy and rising corporate earnings.
Because the European Central Bank's huge QE program has sent almost a third of eurozone government bonds below zero, "even the most risk-averse investors are taking chances on assets and regions that few would have considered just months ago," Bloomberg
"That's exposing more clients to the inevitable trade-off that comes with the lure of higher returns: the likelihood of deeper losses," the news source stated.
According to Bank of America index data, the global bond market is more exposed to losses than at any time on record, Bloomberg noted, even as issuers have leveraged low borrowing costs to sell more long-term bonds.
"This probably means we end up seeing all these reverse in a very unpleasant fashion," said Erik Weisman, a Boston-based money manager at MFS Investment Management.
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