The experts who expect bonds funds to crash in 2015

Concerns have been rumbling for some time that bonds – whether issued by companies or governments – are due for a sharp crash.

At the start of 2014 many wrote off bonds and said that private investors should sell their bond funds and move into shares or other assets.

But those who ignored this advice and kept their bonds investments have done well over the past year.

In fact, as a whole, bonds have beaten equities so far in 2014.

So what does 2015 hold? Again, opinion is divided.

Those who believe 2015 will spell carnage for bonds

Bill Eigen, who has been a bond fund manager since the Eighties and now works for JP Morgan, said that investors who hold bond funds could “easily” see a 10pc slump when interest rates start to nudge up.

“Investors do not realise how quickly bond prices will fall when interest rates rise,” Mr Eigen said.

“But I have never been so nervous about investing in bonds during my entire career, because yields are close to zero and, in fact, for some countries, such as Germany and Switzerland, bonds have become so expensive that their yield is negative.” This extreme outcome arises when short-term bonds will not pay sufficient interest during their lifetimes to make up the difference between the price the investor paid at the outset, and the sum he or she will receive at maturity.

“With yields so low, the central banks, in trying to get global growth back on track, have broken the market. When interest rates rise, which I believe they will do in the US next year and then shortly after in the UK, bond funds could easily fall 10pc and perhaps much further.”

Those who say bonds are a safe bet for years to come

As a consequence of this scenario playing out, policymakers will realise that in recent years they have simply burdened the world with more debt.

David Kauders, a respected economist and investment manager, recommends his clients invest only in UK and US government bonds and has for many years warned about rising levels of debt across the world.

“Since the late Eighties governments have encouraged central banks to follow the Keynesian solution of printing money, which has played its part in property prices soaring higher and benefited share prices. But it has not produced economic growth and, instead, created substantially more debt that cannot be serviced,” Mr Kauders said.

“Britain has total debts that are six times the size of its economy and will continue to rise. This is unsustainable and another recession will come, generated from deflation across Europe. It will be more painful than the credit crunch and equities will fall heavily, while bonds will provide safety.

“In this environment I am advising my clients to hold on to their bonds and wait until shares hit rock bottom.”

Full article: The experts who expect bonds funds to crash in 2015 (The Telegraph)

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