How does the world look to a bond investor? We learn from Paul Brain it's about developed countries trying to repay their debts. The challenge of low interest rates. Europe's debt crisis. The likelihood of countries going bust. And the dubious credit quality of bond markets.
We also learn bond investors' pet names for the world's three leading currencies: the good, the bad and the ugly.1 "These currencies make up about 90 percent of government bond indices," Paul says. Indices factor in the level of a country's outstanding debt. The greater the debt, the larger the country's index weighting. "In this world, funds which track performance against government bond indices are likely to suffer." Paul has a couple of suggestions for anyone looking to invest in bonds.
Two Ideas For Bond Investors
- Adopt an absolute-return style approach – This gives you the flexibility to move investments between regions and bond asset classes in a way that doesn't track the benchmarks.
- Invest globally and opportunistically – This will help you avoid having all your bonds in one interest-rate basket.
Watch the video to learn which countries Paul Brain believes hold out the possibility of more attractive bond yields.
1 The characterizations of currencies as the good, the bad and the ugly are the opinion of Paul Brain, Team Leader, Fixed Income, Newton Investment Management, as discussed in Finding the Right Mix, July 2013: "We believe that indices should be used as a reference tool to help define the range of an investor's opportunities, not slavishly as a means to establish the parameters of portfolio construction. The traditional global government bond indices are overwhelmingly dominated by ‘the good, the bad and the ugly' markets: the US dollar, euro and yen make up just under 90 percent."
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