During times of market trouble, investors have often turned to steady income-generating bonds. But UBS Wealth Management says that will change in the coming decade. “The bond market has always been seen as a safe haven,” said Kurt Reiman, head of thematic research for UBS Wealth Management Research Americas, during a press briefing Monday morning. “The next 10 years, the bond market will not necessarily deliver that safe haven.”
Rising interest rates in advanced economies, increasing sovereign debt concerns and the potential for higher inflation will hurt the bond market, according to UBS’ “The Decade Ahead” report, released this week. In addition, investor confidence in the credit quality of government bonds will continue to trend lower, resulting in an increase in risk premiums, the report said.
Over the next 10 years, we can expect bonds to deliver low nominal returns between 3 percent and 3.5 percent, while inflation-adjusted returns should range between minus 0.5 percent and 0.75 percent.
“The concept of risk-free assets and a passive ‘no risk’ portion of a portfolio is, in our view, obsolete,” the report said.
As inflation and credit concerns persist, bond yields on sovereign debt is expected to increase and become more volatile in the years ahead, UBS said. This new dynamic requires a more active approach to managing a bond portfolio, said Mike Ryan, chief investment strategist and head of Wealth Management Research Americas. Passive buy-and-hold strategies for managing bonds are no longer going to cut it.
Meanwhile, UBS doesn’t predict another ‘lost decade’ with stocks. In fact, “we still believe equities provide an attractive return, possibly the most attractive, relative to other asset classes,” Ryan said.
Stocks are likely to outperform bonds in the next 10 years, with expected returns of between 8.5 percent and 9 percent, UBS said. This time around, we’re not seeing the same excessive valuations and overconcentration in sectors as we saw 10 years ago. Earnings are expected to go up in the years ahead, Ryan added.