Fixed income specialists are not predicting a correction in bond markets, despite expectations that the current economic cycle will end soon.
This was the result of a major global survey of fixed income investors and chief investment officers, conduced by Invesco.
These investors expect the changing economic circumstances to deliver a rare event: a soft landing with a continued flat yield curve.
As a result most of these investors are planning to maintain fixed income holdings in the search for yield, though they are taking a more active approach to in a bid to boost returns, this includes increasing exposure to alternatives, emerging markets and China.
The survey found that almost half of respondents (49 per cent) said they expected the current economic cycle to last another one to two years, but many more North American investors (52 pr cent) expected this to end sooner.
Many investors surveyed said they were concerned that geopolitical issues could disrupt markets, and some are moving allocations accordingly, with almost half (46 per cent) of investors adjusting portfolio allocations in response to trade wars.
The survey found that almost two thirds (65 per cent) of wholesale investors said that Brexit has altered their European and UK allocations. However only a third (34 per cent) of institutional investors noted that they are altering European and UK allocations as a result of Brexit.
Fixed income investors also reported being concerned about high levels of debt globally, and widening credit spreads. This global debt issue is cited as the one most likely to trigger the next downturn.
This fixed income study covered more than 145 fixed income specialists in Europe, the Middle East, Asia and North America, who between them manager $14.1 trilion in assets.
Invesco’s head of fixed income (for Europe, the Middle East and Africa) Nick Tolchard says: “While last year’s relatively unified view of the ‘new normalization’ scenario largely came to pass, investors are now increasingly uncertain due to the growing list of potential risks, from both a geopolitical and markets perspective. As a result, fixed income investors are actively re-positioning fixed income portfolios to be better positioned to handle a variety of outcomes.
“Interestingly, fixed income investors across the global are considering a wide variety of portfolio strategies: some are targeting yield; some are seeking the safety of shorter durations or cash in case volatility spikes; and some want the flexibility of floating rate instruments. With there being so many factors consider, it demonstrates how investors need a variety of solutions to deal with the potential risks.”