The ‘horrible’ situation for government bonds

Schroders fixed income government bonds credit

29 May 2020
| By Laura Dew |
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Government bonds have become an unappealing asset for bond investors with countries likely facing a debt crisis in the future, according to Schroders’ Kellie Wood.

Schroder Fixed Income fund portfolio manager, Wood said her fund had added exposure to Australian investment grade and global investment grade credit during April as credit was looking more appealing it had done in the past.

In a roundtable, she said: “Government bonds look like a horrible place to be and I didn’t think I would ever say that but we are now having to look elsewhere. There are opportunities in credit markets so we have been shifting away from government bonds and cash and into credit.

“But with opportunity comes danger, we want to make sure that any investment is still safe and some parts of the credit market don’t meet that requirement so we have to be cautious.”

She was wary of the long-term effects of the monetary policy measures and what they would mean for government bond markets in the future.

“The biggest legacy of [the pandemic] will be a huge amount of debt, not just for individuals and corporates but for countries and excessive debt is problematic. If you issue debt in your own currency and have flexible exchange rates then debt is less of an issue but over the long-term, if we see yields move to normal levels then there will be huge solvency issues, especially in the US and Italy,” she said.

“Central banks will move towards their objectives, be that inflation or unemployment, and if they are to have any chance of reaching that target then they need to stay in control of the yield curve for some time to come.”

The Schroder Fixed Income fund has returned 5% over the year to 30 April, 2020, versus returns by the Australian bond sector of 4.4%, according to FE Analytics.

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