M&G Investments have produced a very interesting briefing note for financial advisers, looking at the outlook for fixed interest and bond markets in 2012.
We currently use two M&G funds in the corporate bond sector so we are interested in what they have to say on the subject.
Within the briefing note, Jim Leaviss from M&G makes several important points about factors that will influence the bond markets in 2012.
He describes the regime change that is currently being experienced by Central Banks. Whilst they would like to stick to their mandate of controlling inflation, their decisions are currently dominated by economic problems.
Leaviss believes this will result in interest rates being kept low, below inflation rates, for the foreseeable future. We share this view and cannot see any circumstances in 2012 where the Bank of England will start to raise interest rates to levels above the current historical low.
As a result of this Central Bank regime change, Leaviss believes that inflation linked bonds look like ‘cheap insurance’ with the market pricing in significant deflation. Despite this, Leaviss believes negative CPI inflation is unlikely.
He also believes that UK, German and US government bonds look mediocre value at yields below or around 2%. There is limited upside from these government bonds despite economic growth below trend and historically low interest rates.
Leaviss says that the 17 eurozone countries will be unable to make the structural changes required to save the Euro quickly enough. The European Central Bank (ECB) will need to step in to avoid the horrifying consequences of a eurozone breakup.
We agree with Leaviss that the euro sovereign debt crisis will continue to be an unresolved issue in 2012.
Looking across the pond to the US, Leaviss says that there is a risk of fiscal drag as $1.2 trillion of spending cuts come into force automatically, unless Congress can reach agreement on debt reduction. Aside from this, the US economy is looking in better shape, with house prices appearing more stable and an emerging recovery in consumer confidence.
As we start planning our investment strategies for the year ahead, these thoughts from Jim Leaviss will be carefully digested and considered by our Investment Committee.
Photo credit: Flickr/kristinmarshall
