Fixed income investors hoping to match 2019’s returns this year should temper their expectations after a stellar run that has left yields significantly compressed, Kames Capital’s Alexander Pelteshki says.
Pelteshki, co-manager of the Kames Strategic Bond Fund, says despite further compression for yields so far this year – and a potential rate cut to come in the UK specifically – the prospects for returns are dampened.
“We are unlikely to see the same returns that we saw in 2019,” he says. “Headwinds to fixed income investors in the UK could come from the Spring Budget’s fiscal plans, which have the potential to significantly increase the supply of gilts and push yields higher, especially in the long end of the curve.
“In addition, there are global geopolitical tensions in the Middle East, as well as trade frictions between the US and China, that all have the potential to significantly disturb the market.”
The key now will be central bank intervention, with the prospect of a rate cut in the UK sending gilts to their lowest level since April last year.
“Central banks’ intervention (or lack of such thereof) would, as always, likely be the biggest contributing factor to the overall direction of the market,” says Pelteshki.
Nonetheless, the manager believes there will still be opportunities for investors if they are willing to be flexible.
“We are firmly of the belief that truly flexible mandates are best positioned to protect against the secular, political, and fiscal challenges that we see for the upcoming year,” he says.
“Even if it’s a benign year for fixed income, bond markets won’t travel in a straight line. Credit markets and rates markets have had a strong January and there will be opportunities to redeploy cash at better levels in the upcoming months. Flexible strategies will benefit from these opportunities compared to those tied to proscriptive mandates”
 BlackRock Global Government Bond Fund total return as of 31 December 2019 https://www.blackrock.com/hk/en/products/229178/blackrock-global-government-bond-fund-a2-usd
 iShares Corporate Bond Index Fund (UK) total return as of 31 December 2019 https://www.blackrock.com/uk/individual/products/229438/blackrock-corporate-bond-tracker-fund-class-l-acc-fund?switchLocale=y&siteEntryPassthrough=true