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Outlook on government bonds negative

Rachael Micallef  |  21 Feb 2013Text size  Decrease  Increase  |  

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Rachael Micallef is a journalist with InvestorDaily, a Sterling publication.

 

Fund managers are not looking favourably upon government bonds on the back of volatile markets and heightened risk awareness, according to research conducted by Towers Watson.

The research house's global survey of investment and economic expectations found that fund managers had a negative view of 10-year government bond yields, predicting a downward movement in yields to historic lows due to economic weakness and continued central bank asset purchases.

"In terms of specific asset classes, we think that government bonds do not represent great value at the moment and that equities represent relatively better value," Towers Watson's global head of investment, Carl Hess, said.

"However, it is challenging to know what to do about it when the goal for many funds is to reduce risk overall and diversify from existing equity holdings.

"So many funds are buying fewer bonds than before, and those which are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities."

Predicted yields on 10-year government bonds have fallen in every market since Towers Watson's 2011 survey, with Australia decreasing from 6.0 per cent to 3.3 per cent.

In the domestic market, equity return expectations are the lowest they have been since the survey started in 2008, with Australia expected to deliver returns of 6 per cent in 2013.

The survey also showed that expected equity volatility for 2013 was in the 15 per cent to 20 per cent range for major economies.

Towers Watson said this result is lower than previous years but is still elevated compared to longer-term averages.

"Volatile markets and heightened risk awareness continue to make asset allocation very challenging as investors balance priorities like long-term de-risking, short-term market opportunities, rebalancing, and maintaining a strategic asset allocation mix," Hess said.