Low yields and high prices offer little protection from raising US interest rates, inflation and quantitative tightening

The demand for high quality income is a major financial demand with ageing demographics around the world.

Too much money has been chasing bond yields at historically low levels. Low yields and corresponding high prices offer little protection from raising US interest rates, inflationary pressures and quantitative tightening. We feel that government bonds are overvalued and vulnerable to rate rises. There has been some resilience in corporate bonds in terms of prices while default risks have been falling due to global growth. Greater corporate earnings have provided support to interest repayments.

European bonds have received some additional support from more dovish comments over monetary policy from the ECB. There are signs that economic growth is slowing in Europe so the ECB may extend their QE Bond buying programme. While corporate bonds are offering insufficient reward to compensate for gradually rising yields, high-yield bonds are better placed to offer investors better performances. Short-dated corporate high-yield credit is less at risk of rising interest rates.

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