There is a forecasting problem in bond markets, according to Janus Henderson Investors’ Jenna Barnard, with experts failing to predict how long the lower inflation and lower growth environment would last. 
Barnard (pictured), co-manager of the £3bn Janus Henderson Strategic Bond fund with John Pattullo, said the industry had been “awful” at forecasting bond yields
“Yet, as clients we are told year-in, year-out that bond yields will inevitably rise and interest rates will rise, and that a bond bear market will inevitably start,” she said.
Research carried out by Janus Henderson found that every year bar two – 1995 and 2000 – the consensus forecast was for higher bond yields, which many times did not come to fruition.
This was a “pretty strong persistent bias which has been incorrect for many years,” Barnard said.
“So, if there’s one thing that you need to know about the bond market,” she said, “it’s this persistent mis-forecasting of bond yields that is grounded in orthodox economics, which has failed to predict lower inflation and lower growth for many years.”
The reason that the “orthodox mainstream economics” has failed not only to identify but also to fix the current climate of low bond yields, inflation and growth, said the manager, is that forecasting models don’t account for several relevant factors.
Productivity, political uncertainty, demographics, “peak globalisation”, debt, a “balance sheet recession”, secular growth, and technology, all disrupt traditional economics models, she said.
“The impact of technology, excessive debt, balance sheet recession, demographics, climate change – these are all very difficult factors which don’t adhere to the assumptions that traditional economics have made to get their perfect predictions of the world,” said the manager.
Amongst all of these issues with bond market forecasting and analysis, Barnard said that there are specifically three “Fake News stories” about bonds that investors need to be aware of.
The first ‘Fake News’ story is that higher debt equals higher yields.
“There is no real correlation between debt levels and bond yields,” Barnard said, looking at Japan which has the highest debt levels and the lowest bond yields.
The second Fake New story is that yields are so low that bonds won’t hedge the returns to be made from the equity market. This, said Barnard, is also not true.
“German bunds peaked at 77 basis points in 2017 and gave you a capital returns of 14 per cent, very similar to US Treasuries where yields peaked at 3.24 per cent [but their capital return was 15.32 per cent],” she explained.
“And so low yields are not a barrier to future returns per se, what matters is the rate changes in data and whether interest rates can be cut.”
The final ‘Fake News’ story about bond markets at the moment concerns negative yields, which are not negative for everybody.
“Once you hedge the currency back [into sterling], you actually get a better yield from these negatively yielding bonds than you do on a UK gilt in many cases,” she said.
“So that’s all to do with converted interest rate parity and when you hedge the fund’s currency exposure back to sterling you pick up the interest rate differential.”
Barnard and colleague Pattullo also warned of the dangers of ‘illusory diversification’ and salespeople who promise higher-yielding bond alternatives without highlighting the risks.
“We find a lot of myths and misperceptions about bonds, which frankly are often perpetuated by people trying to sell alternatives to bonds,” she said.
“You cannot get a 5 per cent yield in the bond market in sterling and we see a lot of products offering secured yields at 5 per cent plus, as if these were sensible diversification away from bonds, but they’re not and if they’re offering these kinds of yields then they are alternatives to risk assets,” said Barnard. “We find a lot of these products quite suspicious and frankly putting capital at risk.”
As such, Pattullo said a yield of 3-3.5 per cent was achievable over the long-term without sacrificing capital.
“I know that is a tough message for our clients, but if we’re realistic, honest and upfront [about it] trying to manufacture a 6 per cent yield is not just twice the risk of a 2 per cent yield,” he said.
The managers take a “sensible income” approach to the Janus Henderson Strategic Bond fund, blending investment grade, with non-cyclical high yield bonds, and subordinated financial bonds in the UK, Europe and US.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Over the past decade the fund has outperformed the index, making a total return of 67.66 per cent compared to the index’s 65.78 per cent. The fund has a yield of 2.70 per cent and an ongoing charges figure (OCF) of 0.68 per cent.