Bond Investor Glamour Is Over, Report Says

(February 28, 2011) — According to a report by Credit Suisse, bond investors should expect less robust returns in the years ahead.

London Business School’s Elroy Dimson commented: “We are struck by the volatility of the size, value and momentum effects. Over the long term, all three factors have provided a positive risk premium. But over shorter intervals, these premia can easily go into reverse.”

According to the annual Credit Suisse Global Investment Returns Yearbook 2010, bond investors can’t expect bonds to outperform forever, Paul Marsh, emeritus professor of finance at London Business School, stated. The authors found that bond investors should not expect returns for the next 11 years to be as strong as those of the previous 11 years, largely as a result of rising inflation. While bonds in 19 developed markets worldwide outperformed stocks in the 11-year period ended December 21 by an average annualized 3.2 percentage points, the outperformance of stocks over bonds in the same countries has been by 3.8 percentage points since 1900.

The Sourcebook provides data stretching back to 1900, covering bills, bonds, currencies, inflation and stocks, with investment performance updates and analysis of the influence of style, such as size, momentum or value and growth. It spans 19 countries which have being doing business for the past 110 years in Africa, Asia, Europe and North America.

Recent investor moves show that this view to strictly avoid government bonds is by no means unanimous. One the one hand, Danish fund ATP said it will avoid government bonds issued by the European Union’s most indebted nations, according to the CEO of the $73.4 billion Danish pension fund. “When we invest in government bonds, it’s absolutely critical for us that there can be no doubt that we’ll get our money back,” said Lars Rohde, chief executive officer at ATP, according to Bloomberg. He added that consequently, the fund has completely avoided government debt issued by Greece and Ireland, with European government bond holdings only including Danish, German and, to a lesser degree, French bonds.

While Greece received a $146 billion loan from the EU and International Monetary Fund in May and will post a 7.4% budget deficit of gross domestic product, Ireland received an $110.6 billion rescue package and will post the biggest deficit this year in the EU at 10.3% of GDP.

On the other hand, the chief executive of the world’s second-largest sovereign wealth fund believes yields on southern European countries’ bonds became more attractive last year and will continue to improve. According to Yngve Slyngstad, the chief executive of Norway’s $513 billion Pension Fund Global, the sovereign wealth fund sold about 50% of its government bond investments in southern Europe in 2009 and then repurchased parts of that the following year.