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Fixed income falls further from favour, fears Fitch

Bonds are falling out of favour with European investors as their debt fears sink deeper.

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A European fixed income investor survey by Fitch Ratings shows two thirds (67%) of managers expect a slowing of inflows into European bond funds in the second half of the year.

This included 9% of participants who foresaw a more dramatic exodus into cash, gold or higher-yielding assets. Despite more recent market volatility, the results suggested investors already had ongoing concerns about fixed income as an asset class, according to Monica Insoll, managing director in Fitch’s credit market research group.

The report said funds focused on European debt experienced regular outflows throughout the first half of the year, while high yield, emerging market and global bond funds attracted investors away from the eurozone.

"Tactically, fixed income has become a challenging asset class," said Aymeric Poizot, senior director in Fitch’s fund and asset manager rating group.

"Government yields are at risk, because of inflation, mainly in emerging markets, and sovereign issues in developed markets. Credit spreads also now move in tandem with equity markets, given the limited room for further compression and the fundamental dynamic being less supportive, with high yield default rates at an historically low level."

The result had been high correlation between equity, credit spreads and government bonds. Fitch believes this reflected the end of the status of government bonds as risk-free assets.

"With inflation risk and unconventional monetary policies, investors face low risk/return prospects with bonds and some increasingly turn to currency markets to find safe havens and play global imbalances," the report said.

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