Bond Investors are Over-reacting to Market Volatility, says BlackRock

Investors dumping fixed income funds will buy back bonds once the dust has settled says BlackRock as opportunities remain in the sector

Karen Kwok 2 March, 2016 | 12:20PM
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Investors selling billions out of bond funds are overreacting to market volatility, according to BlackRock.

Investors will buy back bonds once the dust has settled, Michael Krautzberger, head of pan-European fixed income at BlackRock predicted at a panel in London this week. Krautzberger did not expect the selloff to continue throughout the year as people were just adjusting their portfolio “rationally” to the unexpected volatile market.

Fixed Income Outlook is Not Entirely Negative

Stock and bond markets are facing volatility thanks to recession fears year to date although risky assets have stabilised in recent weeks. Finding attractive yields in the fixed income market remains a challenge as many bonds are at zero, and even negative yields. Bond yields remain near record lows, partly due to low inflation expectations.

Investor sentiment to the market was obvious – investors are voting with their feet and selling out of bond funds. In January this year, investors sold £310 million UK corporate bond funds, according to data from Morningstar Direct.

However, Stephen Cohen, global head of fixed income beta at BlackRock was not entirely negative in terms of what investors wanted from their fixed income portfolio.

“One positive aspect of the government bond rally is that overall it helps us retain positive returns. When you look at our flows, particular in our ETF business, out of the $25 billion inflows we’ve seen into global fixed income ETFs; $17 billion of that has gone into government bonds.”

Cohen added that the majority of that was into US Treasury bonds from US investors.

Krautzberger agrees. He said during the panel debate that the fear of deflation had become too pessimistic in many parts of the market, and he thought European yield bonds were still very interesting. He also said volatility was an opportunity for active fund managers and that the corporate bond sector in particular looked attractive.

How Will Central Banks React to Low Inflation?

Amid the market volatility, the European Central Bank is under pressure to stimulate the Eurozone economy. The central bank is scheduled to announce its policy decision on March 10. Most analysts forecast a further cut in the deposit rate. Krautzberger said he also expected the central bank could increase its speed of monthly bond purchases by between €10 and €15 billion. Just one measure wouldn’t be enough, he warned, but together it could be a “powerful package”.

“The market is less convinced that negative deposit rates are a positive instrument,” Krautzberger said. “Therefore we think the ECB has to deliver something more than deposit rate cut to avoid the market disappointment.”

Krautzberger expected a “slightly high inflation rate” once the economy had recovered, but current low inflation would continue longer than expected.

How Does Low Inflation Affect Long-term Investors?

Buying UK government bonds is among the safest ways to gain fixed income exposure; the risk is relatively small when compared to other asset classes. However, as the yields have been low for a long time and little signs of a rebound, this safe asset could become a problem for investors who own it in their portfolios. Krautzberger therefore advised investors to be “open-minded” and look at alternatives rather than just government bonds.

“I think a multi-asset strategy can be part of the solution,” he said, “Some multi-asset funds were recently launched which target traditional fixed income investors.”

Investors clearly have subscribed to the solution. Multistrategy remains one of the most popular sectors among investors, with £322 million inflows in January 2016.

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.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk