The headquarters of BlackRock in New York. Bond market giants Blackrock, PIMCO, Amundi and Aberdeen Asset told Reuters there have seen almost no outflows.


Reuters/London


The world’s biggest bond funds are shifting allocations towards higher-yielding corporate or long-dated debt after a savage bout of volatility in core government bonds.
Sovereign bond yields have soared since the rout started about four weeks ago, led by a selloff in German Bunds as some investors drastically revised inflation expectations.
Much of that selling has come from players with shorter-term horizons such as hedge funds and momentum funds, however, and bond market giants PIMCO, Blackrock, Amundi and Aberdeen Asset Management told Reuters they have seen almost no outflows.
But clients are cutting exposure to index-linked paper in favour of peripheral eurozone bonds or even subordinated corporate debt, said Scott Thiel, head of European and global bonds at Blackrock, the world’s largest asset manager.
“We’re seeing clients allocate money into more unconstrained or flexible bond funds,” he added, citing Portuguese government bonds as an example of an attractive bet.
That reflects the recent spike in yields, Portugal’s improving economic fundamentals and the promise that quantitative easing purchases by the European Central Bank through to September 2016 will underpin prices.
Myles Bradshaw, head of the AF Bond Global Aggregate at Amundi, said there is value to be found in credit markets, peripheral eurozone government debt such as Spain’s and strategies that include foreign exchange positions.
“We’ve been underweight Bunds for quite some time,” said Bradshaw, who has $7.2bn of assets under management within Amundi’s overall portfolio of €950bn.
“It’s not yet time to move to overweight Bunds based on what we’ve seen in the last few weeks. There’s better value in periphery and credit.”
Even after the recent volatility, his fund is up and has outperformed the benchmark so far this year, Bradshaw said. The feedback from the big bond funds, which invest hundreds of billions of dollars of client cash, contrasts with some of the recent aggregate flow data from mutual funds.
European bond funds tracked by EPFR posted a net outflow of $1.57bn last week, the largest outflow since the first quarter of 2013 and are on track to post back-to-back weekly outflows for the first time since September last year.
The Bank of America Merrill Lynch global government bond index is down 2% so far this month, a hefty fall in such a short space of time. If sustained, that would be its worst month since November 2011, and bring its year-to-date performance to just +0.5%.
There’s no obvious or agreed explanation for the recent rout, although it followed a 55% rebound in oil prices since January which has prompted some investors to reassess the deflation expectations they had built up in the last two years.
The selloff in bonds was greatly magnified because many investors were positioned the same way, and because liquidity is so scarce that frantic sellers struggled to find willing buyers.
The benchmark yield on 10-year German bonds leapt to 80 basis points from 5 basis points in less than a month, with yields across global sovereign bond markets following suit.
Andrew Balls, chief investment officer for global fixed income at PIMCO, who oversees teams with around $525bn of assets under management, said he expects more volatility ahead.
That is because the bond market is becoming less liquid due to banks shrinking their balance sheets and reducing risk exposure, and regulation that limits the ability of dealers, brokers and banks to hold large amounts of bonds on their books.
The “taper tantrum” of May 2013 and “flash rally” last October both triggered volatility in the US Treasury market, the first pushing 10-year yields higher and the second triggering a collapse of as much as 35 basis points in one day.
“Are we concerned? It’s something you have to navigate and it can be difficult to navigate, but it can also provide opportunities,” Balls said. “We’ve seen no significant shift in European strategies from clients. We’ve actually seen some inflows.”
Government bonds are a key part of pension fund portfolios because they are viewed as an IOU that will be paid on time and in full. For this reason, most pension funds prefer to hold onto their sovereign paper for the long haul.
Bonds account for nearly a third of the $33tn of assets owned in the world’s major pension markets, according to a recent study by consultancy Towers Watson. Government debt made up more than a quarter of UK pension fund assets in 2014.
Patrick O’Donnell, European fixed income investment manager at Aberdeen Asset Management, Europe’s largest independent fund management firm with more than $500bn under management, said it’s not been pleasant for bond investors lately. “Everyone says that they are a buyer on dips, but that gets questioned when the dip is rather aggressive,” O’Donnell said.