Global politics and inflation weigh on bond investors

Unstable world politics loom over bondholders as the single biggest risk to their investments, according to a survey of money managers carried out by Fitch, which also reveals fears over rising inflation on bond markets.

In its latest quarterly survey, 77 per cent of investors told Fitch that political risk is their major concern over the next 12 months – the fourth consecutive quarter it has topped a list of concerns.

The year ahead will see the UK thrown into its two-year EU exit negotiations, while eurosceptic parties will be contesting elections in France, Germany and Italy.

Concerns over the eurozone’s political stability has already led Japanese investors to dump French debt at the start of the year, with investors snapping up German bonds instead and driving the country’s short-term borrowing costs to record lows.

“Rising political risks in the eurozone could spark renewed financial stress in the currency bloc, which could have a significant adverse impact on growth, although this is not our base case”, said Fitch.

Investors have also fled government debt in the wake of US President Donald Trump’s promises to unleash corporate tax reform and an infrastructure-spending programme in the world’s largest economy. This “Trumpflation trade”, despite cooling in recent days, has driven US 10-year Treasury’s to multi-year highs.

Mr Trump’s election has raised the prospect of a spark in global inflation after years in the doldrums. A quarter of bondholders cited rising inflation as risk to their assets – the highest proportion in over five years (higher inflation erodes bond returns).

Rising inflation has led to speculation of a withdrawal in central bank stimulus measures – the second most-cited risk in the survey named by just under 40 per cent of investors.

As Britain prepares to give formal notice for EU withdrawal tomorrow, money managers were relatively sanguine about the chances of an amicable trade deal being concluded over the next two years. Of the respondents, 47 per cent said they envisaged a “mutually acceptable” agreement being struck, including a transition deal from 2019.

The respondents manage €5.8tn in fixed-income assets and were surveyed between February and March.