Bonds back in favour - but what are the risks?

Future long-term returns for bond markets remain clouded due to the growing amount of government bonds being offered, according to a fixed interest specialist.

Tyndall/Suncorp Investment Management head of bonds Roger Bridges said the big question was how governments would buy back these bonds in the long term.

“The Feds have been trying to take some of the heat out of the discussion,” he said.

“But there is still the question of how governments will buy these bonds back and what it will do for bond rates.”

The government bond market a few years ago hardly existed as governments paid off debt. Today it has grown to the extent that in the UK the bond supply is 100 per cent of gross domestic product.

“It is a good thing that there are lots of bonds to invest in again,” Bridges said, “But it does mean there is some risk for investors in the future.”

In the short term bonds are a good alternative to cash, he said, because for the first time in 15 years 10-year bond yields have risen in a steep curve ahead of cash.

“Our short-term outlook is good, as it provides the investors with an alternative to cash,” Bridges said.

“While the economy might pick up, inflation will stay low, and that is good for bonds.

“We don’t see much downside in bond rates.”

While the corporate bond market still exists, there were some questions being raised about this segment in the medium term.

“One of the issues on the horizon is 50 per cent of corporate bond credit will mature in 2011,” Bridges said.

“As many companies prefer to go to banks and the equity market, where will the future supply of corporate bonds come from?”

But despite some questions about future risks, Bridges said it was good people were looking at fixed interest again after the sector played "second fiddle to so many asset classes”.