UK - While the bond market is expecting a pronounced slowdown in global growth, there is enough momentum in the upturn for interest rates to continue to rise and drive bond yields higher, says Investec Asset Management.
Investec said in a release that investors were assuming the worst about the economic outlook, putting too high a probability on a slowdown in global growth.
Commenting on the market, Investec head of fixed income, John Stopford (pictured), said: “Currently, although the global economy is facing several headwinds, notably from high oil prices, we expect growth to recover from this summer’s lull rather than collapse.
“We believe there would need to be a notable deterioration in the economic outlook to prevent the Fed from returning US rates to more normal levels of 3-4% by the second half of 2005, in contrast to the market’s far more moderate interest rate expectations.
“In addition, the resolution of uncertainty over the US elections once get past November may also prove a positive influence.”
Stopford said against this background, at levels of close to 4%, US 10-year bond yields were well below reasonable fair value levels and should rise again into the end of the year.
“Investors’ renewed optimism about the path of US interest rates has also reignited the carry trade and encouraged investors to increase exposure to riskier assets, such as emerging markets and high yield,” he said.
“This trend may continue in the short-term as investors put accumulated cash to work. However, we believe there is little value left in these markets given last year’s rally and they are vulnerable either to a more aggressive tightening of monetary policy or a more pronounced slowdown in the global economy.
“In this environment, active investment management, broad diversification of risk and use of all potential sources of return – including currencies, duration and asset allocation – will be important to deliver good performance.”
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