Sovereign bonds downgraded to ‘highly unattractive’

Developed market government bonds have been downgraded to ’highly unattractive’ by professional services firm Towers Watson.

The company says easy monetary policy from central banks across the world and strong flows into perceived safe-haven assets mean risk premiums on 10-year sovereign bonds have dropped to levels that fail to compensate long-term investors for taking duration risk.

Jeff Chee, head of asset class research for Towers Watson, says: “Intermediate interest rates have fallen to very low levels.

“We think they now offer a very low risk premium over cash and/or are discounting a high probability of a macroeconomic backdrop of 10 to 15 years of economic stagnation. This is too pessimistic in our view and our forecast returns suggest bonds are now unattractive.”

The company also predicts bond yields and risk premiums will remain low over the coming year, driven by deleveraging, continued loose monetary policy and the flight to safety among investors. (article continues below)

Last month, Alexander Smitten, manager of the £208.5m Cazenove UK Corporate Bond fund, predicted that the factors supporting “fundamentally overvalued” gilts will stay in place for some time to come.

Smitten said the Bank of England’s quantitative easing programme will not be unwound for several years while the UK will remain a haven from the eurozone debt crisis, alleviating fears of an impending collapse in gilts.