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Rates could stay lower for longer, argues M&G’s Doyle

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Investors predicting historically-low interest rates will rise after the end of quantitative easing are misguided, M&G's fixed income desk have said.

Following the ‘taper tantrum’ of 2013, where yields on most government bonds jumped after the US Federal Reserve signalled it would look to end QE, many commentators now predict a move to curtail stimulus measures later this year could be the catalyst for a sell-off in fixed income assets.

But three factors could keep rates lower for longer, according to M&G investment director Anthony Doyle.

The fragility of the global economic recovery and high debt levels in the US make it unlikely interest rates will return to pre-crisis levels, he said, limiting the potential downside to bonds.

Powerful deflationary forces will also help keep inflation low, he added, while a “global savings glut” is likely to remain supportive to fixed income assets, especially when combined with demand from pension funds and central banks.

“Given these influences, it is very much possible that those looking for yields to rise back to pre-crisis levels when QE ends may be disappointed,” he said.

“Not only are these yield-dampening forces at play in the US treasury market, but they could also easily be applied to the UK or European government bond markets, potentially providing a useful lesson for the future path of yields.”

As a result he expects many fixed income assets – such as investment grade and high yield corporate bonds – to remain attractive.

“Arguably, ultra-low cash rates and a stable interest rate environment for government bonds would provide a solid base for corporate bond markets as investors continue to seek positive real returns on their investments.”


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