Given our slightly cautious outlook, we maintain a neutral exposure to bonds.
Government bonds
The outlook for government bonds is complex.
Firstly, governments are issuing huge amounts of bonds. Ordinarily this would be negative for the outlook, but when most developed markets are doing the same thing, everyone looks similar on a relative basis. Couple this with a commitment from central banks (in developed markets, to varying degrees) to buy all the government bonds they can lay their hands on, and it is hard to see a materially negative outlook. On the flipside, given how expensive government bonds are, it is equally hard to see a materially positive outlook.
The volume of central bank purchases is just as big as the amount of debt being issued by governments, and it’s happening at almost double the scale as the purchases made in the aftermath of the Great Financial Crisis. But this time, instead of pumping money into the banking system with hope of it trickling down into the real economy, the money is going directly to governments. From there, it is being funnelled straight out into the wider economy – either through direct transfers to individuals or through grants and loans to companies and charities.
In the short term, we think that the economic hole that needs to be filled is so deep that all this government spending will do is cushion the drop. In the short term, this means things aren’t as bad as they might have been. Looking further out on the horizon, we see risks that this spending will continue to circulate through economies around the world, creating growth and possibly also creating inflation.
Although people have worried about inflation at times over the last few decades, it has remained low and stable. We think the conditions this time mean it has a higher chance of materialising. Importantly, few people today have experience investing in a higher inflation environment, which compounds the potential for this phenomenon to become a major risk factor. This is because inflation is bad for bonds and, if it gets too high, it can be bad for equities too. Consequently, we have been gradually increasing our exposure to inflation-linked bonds that protect bond investors by paying a real (inflation adjusted) yield.

Corporate bonds
To prevent another crisis in credit markets due to coronavirus, central banks have flooded this part of the system with cash too. The bonds of high-grade companies (which have lower levels of debt) are now being bought in huge quantities by the US Federal Reserve, the European Central Bank and the Bank of England.
In a similar way to government bonds, the upside from these expensive levels is limited, but so too is the downside. With such a big backstop, we are comfortable holding high grade corporate bonds from quality issuers, though with a preference for US issuers.