Leaviss says central banks have re-routed their priorities over the past few years and turned their attention away from inflation and instead towards boosting weak economic growth. This has boosted inflation and could give investors a nasty shock in the not-so-distant future, he claims.
"Economic stimulus measures such as reducing unemployment could result in the inflation rate drifting higher than markets are expecting," he said.
Inflation is undoubtedly the silent killer of the financial world, undermining investors’ gains in real terms as the value of their money slips away in the rising costs of their day-to-day purchases.
Leaviss, who runs the M&G Global Macro Bond fund, says investors can protect themselves against inflation by buying index-linked bonds, and the manager holds 25 per cent of his fund in the asset class.
Leaviss echoes the views of Richard Marwood, manager of the AXA Distribution portfolios, who recently told FE Trustnet that because of their inflation-buffering characteristics, index-linked gilts represent one of the few areas of the UK government bond market that still offers value.
"The reason we’re still happy holding index-linked gilts is because we’ve got inflation-proofing in there," Marwood said.
"In the conventional gilt market that’s been driven by QE [quantitative easing], all the buying that’s gone on in the QE programme has been just in the conventional gilt market."
"Yields are also very low in the index-linked market, but if we get a spike up in inflation, then you’ll have protection there, while you won’t in conventional gilts."
Hargreaves Lansdown’s Mark Dampier (pictured) was previously more concerned about deflation, which made him wary of index-linkers.
Although he says index-linked gilts are not suitable for the average investor because most people do not understand them, he now thinks investors need to cover all bases in the event of either an inflationary or deflationary scenario. "I have moved a little bit from being anti the whole thing to thinking you need to be more pragmatic. You can’t load it one way. That would almost be like betting on red, in my mind," he said.
"You need a range of things because no-one knows what’s going to happen and we could have deflation before we have inflation. I don’t know what the outcomes are going to be."
Dampier warns that in the short-term, deflation could still be more likely.
"If the oil prices fell, you would get deflation. And that’s already happening in Europe," he said.
However, Leaviss says an improving US economy could prove to be a threat to bond markets in developing economies in particular.
If the dollar begins to appreciate against global currencies, he says this will be a negative factor for emerging market bonds.
"With its economy in better shape than other developed countries, I expect US interest rates to rise earlier than elsewhere in the world and earlier than the market is anticipating."
"The market is currently pricing in no interest hike before mid-2016," he said.
As a result, Leaviss holds a significant overweight exposure to the US dollar.
After a bout of negative news for sterling, the manager increased his weighting to the UK currency – expecting it to pause for breath after its recent decline.
However, he is anticipating further depreciation in the value of sterling in the long-term.
He also reduced the fund’s euro exposure and maintains limited exposure to the Japanese yen.
Leaviss says that the momentum is still set for yen weakness even though the currency has already depreciated significantly given the relative size of the Bank of Japan’s monetary stimulus.
M&G Global Macro Bond
The £688.6m M&G Global Macro Bond fund has outperformed the IMA Global Bond sector over one, three, five and 10 years.
Over the last decade, it has gained 85.45 per cent while the sector has made 61.16 per cent, according to FE Analytics.
Performance of fund vs sector over 10yrs
Source: FE Analytics
It has also outperformed the sector in seven out of the last 10 calendar years, only lagging it in 2005 and the rising markets of 2009 and 2012, when equities surged ahead.
The fund is yielding 1.07 per cent.
Among the portfolio’s largest holdings are US Treasury notes, UK index-linked gilts and UK supermarket giant Tesco.
The fund is tipped toward financials, with 26.7 per cent in the sector, but it holds nearly as much in government bonds, at 24 per cent.
The fund requires a minimum investment of £500 and has ongoing charges of 1.41 per cent.