Bonds not abysmal in 2006

Investment manager Tyndall has predicted global bond yields will rise in 2006, but at a moderate rate as opposed to a spectacular one.

“While yields are going to drift up, it will be drift. There will be no drama but they’re going to go higher,” Tyndall executive, fixed interest, Ross Gustafson said.

He indicated however that several risk factors currently present in the global economy could lead to a more pronounced lift in bond yields should they materialise.

According to Gustafson, the majority of these risk factors revolve around inflationary pressure in the US economy and how the US Federal Reserve reacts to this pressure.

Issues influencing US inflationary concerns include a combination of rising oil prices and raw commodity prices along with declining productivity and rising unit labour costs in the US.

He believes the situation confronting the Chinese economy will also have an influence.

“The Chinese foreign exchange reserve surplus is just going on to one trillion [US] dollars and how this is going to be reinvested, not only from the stock as it currently matures which needs to replenish, but on the continuing growth which is extraordinary, is going to be a challenge for the central banks around the world, and no doubt the Chinese and American capital markets,” Gustafson said.

But in the current climate of low yields, and in particular the low dispersion of returns available, Tyndall favours AAA securities in the bond market.

Gustafson said the manager subscribes to this view because right now exposure to additional corporate credit risk is offering very little excess return.

“Going down the curve spectrum as we saw over the last three years into the lower credits, BBB corporates or even below, those have all been eroded by competitive pressures that have priced them really to levels where we prefer to be in AAA securities,” he explained.