Page 32 - DIY Investor Magazine February 2018

FIXED INCOME IN 2017 AND PROSPECTS FOR 2018
Co-Head of Strategic Fixed Income at Janus Henderson Investors, Jenna Barnard, looks back at 2017, while sharing her thoughts and views on the major themes likely to affect credit markets and the Strategic Fixed Income portfolios in the coming year.
Key points:
• The failure of consensus bond thinking — yet again in 2017
• Key themes impacting credit markets in 2018: a continuation of divergence and disruptions
• Wage inflation, should it surface, by far the biggest risk to all bond asset classes
Lessons learned from 2017?
2017 for me was the perfect example of the failure of consensus bond thinking. So everybody came into the year, in January, expecting higher government bond yields, thinking that there was going to be a regime shift to higher growth and higher inflation in the US economy, and yet again failed.
Inflation peaked in February* and collapsed afterwards and we’ve seen no signs of wage inflation, really in any
developed market economy that has low unemployment. So based on the experience of 2017, John and I
actually went back and looked back at how many times consensus has been wrong on government bond yields, and we actually found that in the last 26 years, 24 of those years, consensus has forecast higher government bond yields**.
There’s only been two years when they forecast lower bond yields. And I think that is endemic in our industry and it explains the underperformance of many areas of active fund management. Really, it’s just a huge misforecasting that goes on year, after year, after year — unchecked.
*US inflation **10-year US Treasury yields, Philadelphia Fed Survey of Professional Forecasters, as at June 2017
Key themes for your markets in 2018 and portfolio positioning implications?
I think the key theme for credit markets today and going forward is divergence – and disruptions. We’ve seen huge amounts of industry disruption, which is causing problems for certain corporate bonds in our market. Technology is obviously a huge source of disruption and we see that in the retail sector, most obviously.
DIY Investor Magazine | Jan 2018 32