Tache says if one believes that rates are likely to fall roughly in line with what the market expected at the end of last year, then the logical thing to do is buy long-dated government bonds, and nothing else.
But even since the start of 2024, markets have rushed to reprice bonds based on the view that central banks may not cut rates at the trajectory that was expected in the final quarter of last year.
This may be why investors who own either the UK bond market index or the global bond market index have lost money so far in 2024.
Taché says there is considerable risk attached to trying to second-guess how central banks will act, but also around how they will communicate before acting, with the latter also capable of moving fixed income markets.
With this in mind, he says it is justified to own a portfolio that is broader than just government bonds or cash, despite the intuitive appeal of owning those assets when rates fall.
Edward Harrold, fixed income investment director at Capital Group, says that if one had focused simply on owning long-duration bonds in anticipation of a recession and of rate cuts, “one would have missed out on a lot of returns, because assets which might not have been expected to do well in those market conditions, such as emerging market bonds, actually performed well”.
Kelly Prior, part of the multi-manager team at Columbia Threadneedle, says the options available to bond investors have expanded massively in recent decades.
She says that “at one time there were no high yield funds in the UK”, and that the advantage of owning a range of different bond funds is that “some will work in periods of time when others don’t.
"We own the Allianz Strategic Bond Fund, for example, and that has had periods where what they do hasn’t worked, but we are confident it will work when some of the other bond funds we have won’t”.
Her overall approach to building a fixed income exposure in portfolios is to “think about how particular parts of the bond market relate to the equity holding we have in a portfolio. So if we have a lot of growth equities at any one time for example, that would impact how the fixed income exposure is constructed.”
Stuart Chilvers, fixed income fund manager at Rathbones, agrees that one of the characteristics of fixed income markets right now is that at current prices, bonds do represent diversifiers in the event of certain economic conditions and market events, and that this was not the case prior to the pandemic.
