Towers Watson downgrades intermediate bonds to ‘highly unattractive
Professional services firm Towers Watson has downgraded intermediate global government and intermediate inflation-linked bonds – those with around a 10-year maturity — to ‘highly unattractive’.
This is in line with its view that ongoing money-printing by central banks and flows into so-called safe assets have pushed intermediate bond risk premiums to very low levels that no longer properly compensate long-term investors for taking duration risk.
Robert Brown, chairman of Towers Watson’s Global Investment Committee, said intermediate interest rates have fallen to very low levels. We think they now offer a very low risk premium over cash and/or are discounting a high probability of a macroeconomic backdrop of ten to fifteen years of economic stagnation. This is too pessimistic in our view and our forecast returns suggest bonds are now unattractive.”
According to Towers Watson the risk premium, in excess of cash, available from intermediate and longer-term bonds is now significantly lower, mainly because quantitative easing has absorbed a significant share of the supply of government bonds, while there has also been a fall in the overall stock of so-called safe assets due to the US mortgage and European sovereign debt crises.
Towers Watson research suggests that, in the next year, deleveraging, easy monetary policy and flows into so-called safe bonds are likely to keep bond yields and bond risk premiums low.
However, in the medium-term, as private-sector deleveraging problems fade there is likely to be a stronger and faster cyclical recovery than most intermediate bond markets appear to be pricing. Intermediate bonds therefore have both medium-term downside risk and very low risk premiums.
Longer-term bonds (over ten years) are also expensive, although the strength of the view varies by country and maturity.