In a new report titled “Security Selection and Liquidity Key for Bonds in 2013, Standish Global Bond Market Outlook,” Standish notes that global macro risks have diminished, clearing the way for “fundamentals to once again drive returns.”
Nevertheless, returns are likely to be lower for fixed income in 2013 than they were in 2012. The current low yields could significantly reduce the potential for capital appreciation, Standish notes.
“We believe valuations have become stretched in a number of sectors, so investors will need to be in the right sectors and in the right securities,” David Leduc, chief investment officer for Standish and the author of the report, said in a statement.
Standish also cautioned investors about the potential for rising inflation, particularly with regard to U.S. Treasuries and German bunds. The inflation threat to these investments could rise as investors begin to anticipate more stable economic activity in the second half of 2013, it said.
Bond funds continue to be popular even as stocks have surged this year. Through mid-February bond funds took in roughly $43 billion in inflows, about the same amount they attracted during this period last year.