Fixed income investors will face a tougher ride for returns in 2013 than they did in 2012, therefore requiring an actively managed investment approach, industry experts have advised.

According to Threadneedle CIO Mark Burgess: “We believe there will be another critical difference between this year and next. In 2012, fixed income investors enjoyed a relatively easy ride with all areas delivering robust - and in some cases spectacular - returns. By contrast, successful active management is likely to be a more significant determinant of returns in 2013 as valuation concerns provide headwinds for a number of fixed income markets. In short, it will not be as easy to make money in fixed income in 2013 as it was in 2012.”

Schroders head of global macro Bob Jolly agreed that there cannot be a repeat in 2013 of the bond market returns in 2012, and therefore an active management approach is required.

He explained: “With yields on developed market bonds still at depressed levels and credit spreads considerable lower than last year, it’s clear that a passive approach towards global bond market beta is unlikely to make you rich this year.”

Jolly added that it would be another year where markets will swing between euphoria, through either growth or politicians offering positive surprises, and misery – when either the political system takes its collective foot off the reform agenda or there is a temporary ebbing in economic momentum."

While ING IM head of strategy Valentijn van Nieuwenhuijzen agreed that it is unlikely 2013 would be as good as 2012 for bond markets, as “the strong rally in government bonds and credit in 2012 causes many treasury and corporate bond yields to currently trade at or close to record low levels and thereby has significantly reduced both the maximum and expected excess return these assets can generate over cash”, he added that there should still be a stable undercurrent of flows towards bond markets as the search for yield rather than capital gains continues.

Van Nieuwenhuijzen also predicted that the low bond yield environment seems likely to persist with G4 10-year treasury yields likely move around in a 1-3 per cent range over the next couple of years compared to a 3-6 per cent range before the 2008 crisis.

However, he explained it does not mean treasury yields cannot rise from current levels. “Actually, we are expecting them to do so next year as some of this year’s ‘safe haven’ flows reverse course or, at least, the marginal inflows move away from G4 treasury markets to peripheral or emerging sovereign bonds or corporate credit."

In contrast, Burgess questioned the appeal of ‘safe haven’ core government bonds such as UK gilts and German bunds. “Yields remain at historically low levels (and are particularly unattractive in real terms) and the risk of capital losses down the road is significant. The US Treasury market faces similar concerns, although the continuation of QE by the Fed means that yields are unlikely to balloon in the short term. Higher-yielding areas of fixed income such as emerging market debt and high yield look more appealing, although strong returns over 2012 to date and significant spread tightening mean it is much more difficult to make a strong valuation case for these sectors than it was a year ago.”

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