Fixed-income investors have flocked to ‘safe-haven’ bond markets in the wake of the Brexit referendum, but Brandywine Global cautions that these markets may not offer good value for their level of risk.
Speaking to InvestorDaily, Brandywine’s co-director of global macro research and portfolio manager of global macro strategy, Francis Scotland, said many of the so-called safe havens (bonds, gilts, treasuries and similar) still had significant exposure to risk.
“The whole idea of bonds in the developed countries being safe havens seems like a bit of an oxymoron. It seems to us that’s where the risk of a capital loss is greatest – you could easily have a 50 to 75 basis point retrenchment in safe-haven bond yields,” he warned.
Mr Scotland said the “enormous rally” seen in these markets had resulted in prices becoming “incredibly expensive” when compared with emerging market bonds.
“Given how low yields are, and given this propensity for world policy makers to really try to make an effort to get things moving again, we suggest the rewards/risks [are] tilted against bond prices in the developed countries,” he said.
Emerging market bonds offer more value, Mr Scotland said, noting that an improvement in economic growth would further add to their relative value.
“A better global growth outlook could actually be favourable to some of the markets that people don’t really like in the emerging world,” he said.
Mr Scotland said Australian bonds still offer value, noting that they are “a reasonable investment for the time being”.
“They’re one of the higher yielding bonds in the safe-haven bucket, so to some extent there’s relative value there,” he said.