While Holman thinks that gilts and the corporate bonds linked to them will see poor returns in the coming year, he says the high yield sector does not bear that risk. He adds that although the fixed income market will not enjoy the same level of success in 2013 as it has done in 2012, high yield should still offer attractive returns.
"Investors will not see the type of returns enjoyed in 2012, this is just not mathematically possible, but a stock-picking approach to the asset class will produce the most attractive returns from the sector in the coming 12 months and that should comfortably outperform both corporate bonds and gilts," he said.
"In our view, the strongest driver for high yields is the technical demand for income and the intervention that we see in the markets almost every day which is making income more and more scarce."
"Demand is by far outstripping supply, with central banks buying up large bond portfolios and financials shrinking their balance sheets, which has a profound impact on supply in the market’s largest non-government sector."
"This dynamic is firmly in place for 2013 and we believe this to be the primary driver of prices in the year ahead."
However, he adds that bond investors need to be aware of the poor outlook for earnings in the European corporate sector.
"On the flip-side though, Europe has an earnings problem ahead of it and we would expect high yield corporates to be most affected by this."
"The key ratio that bond investors look at is net debt to EBITDA, and with lower earnings, this ratio is likely to increase for many companies in the sector over the following 12 months."
"This increases the likelihood of ratings downgrades, hence high yield can be expected to face a fundamental headwind in the future, but they do start the year in reasonable shape, which will keep the default rate under control in our opinion and therefore credit deterioration should be offset by the technical demand for the asset class."
Holman explained why he thinks investors should not be concerned by talk of a bond bubble.
"Firstly, we think it is worth dealing with the term “bubble”. True bubbles are created when an originally sound investment proposition attracts so much demand and attention that the price becomes highly inflated."
"At this juncture, there can become worries that the bubble may burst, but typically this tends to happen once the original sound investment case is no longer supported by fundamentals, not when the asset class is still underpinned by a robust investment case."
"From where we sit, the only part of fixed income markets that could come close to being bubble-like are the core government ones, for example gilts and Bunds."
"These are expensive because of the highly challenging and unique environment that we have been operating in for the last few years."
"In the case of gilts, we can add the fact that one buyer [the Bank of England] has steadily bought up 30 per cent of the market and is relatively indifferent on price."
"In fixed income we can also be a little more quantitative on just how inflated a bubble can realistically get."
"Five-year Bunds at 0.33 per cent will return a maximum of 1.65 per cent over five years; in theory investors could have all of this today if rates drop to zero, but this is ultimately all that is available from this particular bubble."
Whether or not this is a bubble is a matter of opinion that depends on the reasons why people are holding such low-yielding investments, Holman says.
"Clearly there is very little value left in these core markets and investors are probably holding them for other reasons. These 'reasons' need to stay in place to keep yields this low."
"Our view is that investors are going to be fortunate to see a positive total return in the next 12 months."
Holman explains that most investment grade bonds trade on a spread to these core markets, meaning that they have benefited from the massive demand for gilts, but also that their prices have been inflated by the same mechanism.
This makes them less attractive than high yield instruments, but Holman says that investors should not discount them altogether.
"Corporate bonds also have a spread which reflects the market's view of the credit and liquidity risk that is taken over and above gilts," he continued.
"This spread is still good value by historical standards, so there is a mitigating fundamental argument in corporate bonds."
"The conclusion to all of this is that we should be focusing attention on those areas of fixed income where investors do not have to take the 'gilt risk'; which points us nicely to the high yield sector of the market," he said.
The spreads on the high yield market are still some way short from both the historic average and recent highs, Holman says, while the default rate is stable due to quantitative easing policies.