We asked the question what a diversified bond portfolio is going to return for the rest of the decade to a few hundred senior fund buyers in 10 European countries over the course of the year. The answers we received were remarkably similar, or predictably similar perhaps, considering where government bond yields now stand.
On aggregate, three quarters of fund buyers, all of whom were polled at Expert Investor forums held across the continent in the first half of the year, believe bonds will return less than 2% annually over the next five years; majority of investors in all countries we surveyed.
There are still some optimists left, though just 2% of investors expect bonds to return anything more than 4%. The most upbeat fixed income investors are to be found on opposite edges of the continent: in Bilbao, the capital of Spain’s Basque region, and Finland, approximately four in 10 fund buyers see bonds returning at least 2% annually. Investors in Iceland, where bonds are actually among the highest-yielding in Europe, are most bearish: 92% of them expect a diversified fixed income portfolio to return less than 2%.
The dire return prospects for bonds are reflected in these same investors’ asset allocation intentions. Expert Investor’s freshest investor sentiment data show there is, despite the ECB’s ongoing QE programme, almost no appetite for investment-grade bonds. In almost all countries, those intending to decrease their exposure outnumber those planning to increase their allocation by a significant margin.
Unsurprisingly, attitudes towards high-yield bonds are slightly more optimistic. In most countries, more investors want to buy than to sell. After all, the reason that investors still expect a (small) positive return from their bond portfolios, is the fact that they contain some sub-investment grade paper…