Where Should Fixed Income Investors Be Looking in 2013?

PERSPECTIVES: 2013 is going to be a tough year for holders of perceived safe-haven bonds but the demanding environment should not distract investors from the potential rewards in other areas, says Franklin Templeton

Franklin Templeton Investments 10 April, 2013 | 3:54PM

This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, John Beck, Senior Vice President and Co-Director at Franklin Templeton International Bond Group, Franklin Templeton Fixed Income Group, discusses why 2013 is going to be a tough year for holders of perceived safe-haven bonds but says the demanding environment should not distract investors from the potential rewards in other areas of fixed income.

Avoiding "Safe Havens" is Key to Improving Fixed Income Returns 

Amid much discussion of a “great rotation” out of bonds into equities, investors could be forgiven for thinking that the prospects for fixed income asset classes in 2013 look gloomy across the board. It is true that in recent months returns from many sovereign bonds perceived as “safe havens”—particularly those from the US, Germany and the UK—have turned negative as their yields have moved up from the historic lows seen in 2012 in the midst of the eurozone debt crisis. 

In January, holders of 10-year US Treasuries lost their entire 2013 coupon as a result of a negative capital return. More recently, yields on 10-year Treasuries have traded above 2%, up from the record low of 1.39% reached in July 2012, raising the possibility of a negative return over 2013 as a whole for Treasury investors. However, such an adverse outcome for US Treasuries and other perceived safe havens might not necessarily be replicated in other areas of fixed income. We believe investors can still earn a reasonable return this year by diversifying away from perceived safe-haven bonds into other areas, such as emerging market sovereign debt or high-quality corporate issues. 

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Franklin Templeton Investments  is one of the world's largest asset management groups, offering UK investors a range of over 80 funds across different market sectors.

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