2021 Outlook: What Next for Bonds?

Experts think government bonds will continue to be an unattractive asset for most investors, but any setback in the recovery could still spark another flight to safety

James Gard 4 January, 2021 | 9:10AM
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Currencies in a suitcase

With interest rates set to remain ultra-low, inflation weak and post-Covid economic growth uneven, bond investors may be forgiven for expecting more of the same in 2021. But not all parts of the fixed-income landscape are on the same track: developed market government yields are low and prices expensive, while corporate debt has better yields but the risk of default remains real in a fragile economy. Professional bond managers are increasingly looking to emerging markets for better yields and because countries like China are on a faster recovery track than many developed nations.

In terms of asset classes, equities rallied strongly towards the end of the year, pushing the March/April crash, which provided a big boost for bond prices, further into the rear-view mirror (we looked at the case for bonds in October). Barring another period like spring 2020, investors won’t have cause to panic and seek safety (at all costs) in fixed income in 2021 (bonds are used to smooth out volatility and preserve capital and they performed that job well in the market crisis).

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James Gard  is content editor for Morningstar.co.uk