The problem with government bonds, says Guillaume Paillat, is not so much that they have gone down this year, because there should always be periods when they fall in price, but rather that they have been very volatile.
Paillat, portfolio manager at Aviva Investors, says: "Bonds have been doing worse than equities this year. At the moment gilts are falling and catching up, or catching down, with the falls that happened to US Treasury bonds earlier this year.”
The heightened volatility this year means that “government bonds have, for me, moved from being a strategic part of the asset allocation to being a tactical asset, one that you own only when valuations are right,” says Shaniel Ramjee, senior investment manager at Pictet Asset Management.
He cautions investors not to repeat the mistakes many made in the 1970s – the previous period when inflation rose sharply and suddenly and bond prices fell.
He says: “When yields began to rise, people’s initial reaction was to look at the extra income they were getting, rather than the capital loss that was occurring in their portfolio, and that happened for years, and every year they thought they were doing better, until they realised they weren’t.
"I think the option for clients now is to think about investing in a wider range of government bonds and regions, because the next stage of the cycle is likely to involve a greater divergence in how the bonds of different countries perform, and that could represent an opportunity. Currency is also relevant when you are considering buying.”
Anthony Rayner, multi-asset investor at Premier Miton, says: “Central banks continue to drive markets but, importantly, in a very different way to the past 30 years. The wider picture is that economies globally are increasingly marching to their own drumbeat.
"As rates move higher, so a country’s imbalances become clearer. For example, higher rates bring into focus the degree of fiscal imbalance and specifically the higher cost of government borrowing.
"This is in stark contrast to the co-ordinated lower rates that characterised much of the globalisation years and which helped to soften the differences between economies and their financial markets.”
Price of bonds
That is a journey that James Beaumont, multi-asset investor at Natixis, has already been on. He took the view several years ago that bonds were generally over-priced, and so went profoundly underweight relative to the index, but he is starting to find them more interesting as a potential investment now.
He says: “We took the view, when government bond yields went literally below zero, that it could not continue. We didn’t know what the catalyst would be, but we thought it had to change. And that view hurt us in our portfolios for a long time, but it has worked a bit this year.
