‘Inflationary headwinds key risk to bond investors’

Even as India is likely to gain its fair share of capital flows coming to emerging markets in 2013, international investors will be somewhat wary of India at the end of the year, says Gary Dugan, MD & CIO—Asia and Middle East, RBS Wealth Division. In an interview with FE’s Devangi Gandhi, he talks about a possible end of the 30-year-long bull run in the US bond market and the likelihood of investors who shunned the equity markets in 2008 in favour of bonds reversing their strategy.

You have argued that the 30-year long bull run in the US bond market may be close to an end. Can you tell us why?

Inflationary headwinds are the key risk to bond investors’ total returns in the years ahead.

At the core of the bond rally were the deliberate anti-inflation policies of the US Federal Reserve in the late 1970s and early 1980s which sowed the seeds of rising bond prices and declining yields.

However, the world’s central banks’ current inflationary policies look set to derail the bond market—leaving fixed-income investors exposed to the prospect of lower, and in some cases negative, returns. Even as short-term interest rates remained lower, we see long-term interest rates rising, in turn pushing the bond prices lower. The huge demand for government bonds in recent years has pushed yields down and prices up (yields move inversely to prices) to such an extent that bonds have never

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