Bond investors should brace themselves for pain as the era of low interest rates and inflation come to an end, according to Ryan Paterson, Research Analyst at Thesis Asset Management.
Paterson believes years of healthy returns for bond investors, fuelled by low rates and inflation, could be about to reverse as the fixed income market heads towards bear market territory.
“Most government bonds markets have generated negative total returns over the last 12 months and we think a bond bear market is on the horizon given robust growth and rising inflationary pressures,” Paterson says.
“We also think that market expectations are underestimating the pace of monetary policy tightening further ahead and this leads us to believe there is more pain ahead for fixed income investors.
“Whilst US Treasuries have been the primary driver of the bond bear market, yields across the globe are starting to get dragged higher. We are therefore remaining short duration and underweight government bonds.”
Paterson also believes that the corporate bond market is another area for investors to be cautious of.
“The credit market doesn’t look that enticing either, having already benefitted from a supportive corporate environment of low default rates and a relatively buoyant earnings backdrop,” Paterson says.
“We feel the compression in corporate bond spreads is now behind us, and the fixed income space leaves little space to hide.”