Government bond markets in 2017: remaining alert to political risks

Mitul Patel, Head of Interest Rates, Henderson GI

Mitul Patel, Head of Interest Rates at Henderson, discusses the themes likely to shape government bond markets in 2017, with shifting political landscapes in the developed world, and changing expectations for the global economy, pointing to elevated levels of risk.

What lessons have you learned from 2016?
Politics have driven the key shifts in market pricing in 2016. While the results were not necessarily easy to predict, it is tough not to draw the conclusion that for all the analysis of the economic cycle and monetary policy, the shifting political landscape has dominated markets in a bigger way than most people foresaw.

2016 marks the year when central bankers became increasingly desperate – with mixed results. Confidence in central banks is at the lowest we have seen in quite some time. There is little belief that central bankers have the tools to deal with the current economy and in the future. What’s worse is that central bankers appear to have little idea as to how the tools they deploy actually work.

What are the key themes likely to shape the markets in which you invest in 2017?
We need to see what policies the US government implements under Donald Trump and what Brexit actually ends up looking like. Coupled with this, we are likely to see rising political risks in Europe.

Foto: © tashatuvango/

Foto: © tashatuvango/

Aside from the potential political event risks, the global economy enters 2017 on a relatively firmer footing. If we are finally moving to a world where fiscal policy is used more actively, we might be forced to revise up our future forecasts for growth and inflation for the first time in years.

This could have more profound consequences for markets. Do investors shift from a mindset of ‘yield at any price’, to seeking growth-sensitive assets? If deflation fears are fading away, are we about to see central banks becoming more hawkish than markets (and central bankers themselves) currently expect? Will the bond vigilantes come out of hibernation, punishing governments and central bankers who don’t stick to their rules and mandates? Or is this just a temporary blip in a world that still suffers from a secular stagnation?

What are your highest conviction positions moving towards the new year?
As markets are likely to remain volatile, we seek to remain nimble in our positioning. Currently we expect yield curves to steepen from here, particularly in the under 5-year portion of the US government curve, where markets are yet to price in a more uncertain monetary policy outlook under the Trump administration.

What should investors expect from your asset class and your portfolio(s) going forward?
While yields have backed up from their lows, they are still low by historical standards. An increase in volatility could undermine current valuations, as the yields available still look insufficient compensation for the volatility investors in government bonds are likely to experience. With little carry (interest income) on offer, the potential for negative returns on government bonds is still a risk. We remain alert to the risks that the shifting political landscapes pose, as well as shifts in expectations for the global economy.

Henderson Global InvestorsFirmenprofil
Henderson Global Investors (HGI) ist ein weltweit tätiger, unabhängiger Vermögensverwalter, der zum Ziel hat, seinen Kunden eine exzellente Wertentwicklung und erstklassigen Service zu bieten. Henderson wurde 1934 gegründet und ist nach seinem ersten Kunden, Alexander Henderson benannt. HGI ist mit mehr als 1.000 Mitarbeitern in 19 Büros weltweit vertreten und betreut ein Vermögen von über 116,6 Mrd. EUR für institutionelle und private Anleger weltweit. Zu den Kernkompetenzen gehören neben globalen und europäischen Aktien auch internationale Anleihen sowie Multi-Asset-Strategien und alternative Anlageinstrumente.

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