Bond market behaviour no longer just economic theory

The head of fixed income at an international funds management firm has warned that the key to predicting the movements and future directions of bond and currency markets can no longer be based purely on textbook economic theories.

Newton Investment Management leader of fixed income Stewart Cowley said: “A lot of things lie outside purely guessing GDP [gross domestic product], inflation rates and unemployment rates right … These factors are distorting the asset markets in a way which means that they are being valued away from things that you’d expect if you’d just looked at the economics of the day.”

He revealed his organisation had completed research that showed the fixed income markets could only satisfy one-third of the asset and liability matching of the world financial market.

“This is going to drive bond yields in a way that economics would not detect, and if you only look at the economics of the world you will get this wrong,” Cowley said.

According to Cowley, two influencing aspects of the world economy that are highlighting this phenomenon are the ageing population of every country and the global risk landscape as perceived by investors.

In particular, the perception by people that the world is a less safe place these days is proving to be a boost for bond markets.

“People are worried about all kinds of security issues around themselves in a way in which they weren’t five or six years ago. The change in this risk landscape in peoples’ minds, real or perceived, is driving the world into a greater emphasis on fixed income and risk management as opposed to just return getting,” he explained.

“That change in the risk landscape has led to high levels of fixed interest in portfolios and people being asked to ‘milk’, if you like, the fixed interest area of their overall portfolio,” Cowley added.