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by Jörg Billina, Euro am Sonntag
S.imon Lue-Fong is Head of the Fixed Income Boutique at Vontobel Asset Management. He has 29 years of experience in the bond segment. Lue-Fong advises investors to increase the proportion of corporate bonds with low credit ratings or emerging market bonds in their portfolios.
€ uro on Sunday: Mr. Lue-Fong, 30 years ago the ten-year US government bond and the German federal bond each yielded over nine percent. Will such returns never be achieved again?
Simon Lue-Fong: Certainly not for the foreseeable future. In response to the financial crisis and the corona pandemic, the industrialized countries have massively increased their debts. They would not be able to cope with interest rates like 30 years ago.
Safe government bonds usually bear negative interest. Do they still make sense in a well diversified portfolio?
They are certainly ruled out as a source of return. However, government bonds stabilize the portfolio when the stock markets correct. In my experience, only stocks in the portfolio make no sense. Anyone who wants to invest exclusively in government bonds can purchase bonds with longer terms. The papers still bear positive interest.
Inflation rates are picking up in the industrialized countries. That diminishes the income. Is the trend continuing?
At least until the coming year. The increase is not only explained by base effects compared to the previous year and by supply bottlenecks for preliminary products. The economic recovery is strong and the labor market is recovering faster than initially expected. In addition, the states are investing money in the infrastructure. This is also driving the economy.
The central banks will still not raise interest rates?
No. Thanks to higher inflation rates, states and companies can reduce their high levels of debt. That is entirely in the interests of the central banks. You’ve studied history. After the Second World War, thanks to inflation, the national debt in the USA fell from 110 to 50 percent of the gross domestic product in just ten years.
From what inflation rate would the ECB have to raise interest rates?
The ECB recently changed its strategy. It does not provide a clear number. However, it now wants to temporarily tolerate an inflation rate of over two percent. An early tightening of the Monetary policy is not to be expected there. At the same time, the ECB is signaling to investors that it wants to prevent the inflation rate from rising further. The communication works. Investors are not aggressively parting with bonds.
What do you think of inflation-linked bonds?
We favor conventional papers and recommend buying them when their prices fall or yield increases. The liquidity of conventional bonds is significantly greater than that of inflation-protected bonds.
If you want to make money with bonds, you have to take more risk?
Yes. Investors need to increase the proportion of lower-rated corporate bonds or buy emerging market bonds. These have a spread over government bonds of two to five percentage points. However, we advise investors to use the expertise of fund managers when looking for a spread.
Does paper denominated in dollars make sense for German investors?
Yes, we are assuming a stronger greenback against the European single currency in the coming months. In addition, US bonds have more attractive interest rates.
Widely spread The portfolio comprises 241 positions, including bonds from Ukraine and Egypt. Since the beginning of the year put the fund by 5.8 percent to and thus occupied in the Asset class emerging market bonds 1st place.
Image sources: Vontobel AM