Where are yields headed? At what pace will the Fed cut rates? Will the UK run out of fiscal headroom?
Your guesses are as good as ours, comrades.
But what Asset Allocator can do, in place of making bold predictions, is check the pulse of the wealth management sector on the sentiment surrounding government bonds over the year ahead.
We have surveyed our readers on which asset classes they think will do well and badly during 2025.
Let’s begin with the bad news. 45 per cent of DFMs believe fixed income will have the worst year of any asset class, and within that, half of those respondents think government bonds specifically will endure the brunt of it.
Some have already started acting upon this pessimism — the average allocation to government bonds fell by 1 percentage point over 2024, from 9 per cent to 8 per cent.
Indeed there are certainly a number of scenarios that could spell danger for debt-issuing governments.
If growth in the US continues to accelerate and inflation creeps up, then real yields may soar and, inversely, bond prices may sink.
Should the Fed further push back the pace of rate cuts in response to this, our allocators believe Treasuries could encounter significant headwinds.
One particular product that has continually screwed investors who decide to bet on falling rates is the iShares 20+ Year Treasury Bond ETF, otherwise known by its ticker TLT. This has become something of a ‘widow-maker’ fund in recent years.
Last year we questioned the allocators who continue to stand by it in sickness and, uh, in sickness.
But it’s not all bad news for fixed income. There are some allocators who are upping exposure to the asset class in light of such sprightly yields.
“We would note that US T-bills offer a cool 4 per cent with no associated volatility,” said Julian Howard, multi-asset chief at Gam. “There is no better risk-adjusted return available right now.”
Arbuthnot Latham is another allocator which has seen its government bond exposure hit a two-year high in the belief that Eurozone inflation will grind downwards.
We caught up with Peter Doherty (not of Libertines fame) to shed some light on their positioning in the new year.
And while we’re here, one final piece of AA literature on government bonds that we’d like to draw your attention towards is our analysis of what growing fiscal deficits mean for portfolios.
We’ll leave you with this thought: should the discourse surrounding government debt still be framed by both market participants and the media in negative terms, as if it is a credit card-bill that needs imminently repaying?
“They [nations] have ‘too much’ debt which needs to be reined in, balance the books, tighten our belts, live within our means — all these personal finance parallels and metaphors,” Hawksmoor analyst Robert Fullerton wrote last year. “We sometimes worry about our children having to pay it back at some point.”
What do you think? Let us know in the comments below.