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Finding value in government bonds

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

Economic growth has been more robust than anticipated so far in 2024, mainly driven by the US. But the monetary cycle remains subject to elongated lags in its impact on the economy and we believe restrictive monetary policy will slow economic momentum, especially now that huge US fiscal stimulus is beginning to fade.

Current indicators of the US labour market show continued hiring, but at a slower pace as vacancies have reduced. Beneath the surface, forward looking indicators point towards softening. We expect unemployment to increase but to peak at a lower rate in than in many prior cycles.

Companies, having spent the last few years working hard to make hires, will be inclined to hoard labour. Our central case is that US unemployment will peak at levels similar to the early 2000s, somewhere in the 5% to 6% vicinity.

Inflation is coming down but services remains as the sticky last leg. “Supercore” services inflation – i.e. excluding housing – is most highly correlated to nominal wage inflation. This should ease due to the gradual loosening of labour market conditions, which themselves have been partly helped by net immigration.

One of the biggest risks to our funds’ strategic long duration is a second term for President Trump. His threat to the independence of the Fed is more one of principle and reputation rather any meaningful ability to implement change. However, the fiscal situation is more concerning, with tax cuts likely to outweigh spending cuts at a time when the fiscal deficit is already unsustainable. Increased tariffs and lower immigration would also worry economists.

Nevertheless, we retain our duration positioning as we continue to believe developed market sovereign bond yields offer great long-term value with real yields looking attractive.

The exact timing of the first US and UK rate cuts, as well as further Eurozone cuts, does not matter as much as the fact that we are approaching the economic conditions that will allow for a more rapid return to neutral monetary policy. In the meantime, one is being paid an attractive yield as we await capital gains; patience is a rewarding virtue.

We have allocated our duration budget to short and medium-dated bonds (i.e. less than 15 years) as we expect the yield curve to steepen when rates are cut.

For corporate borrowers, fundamentals look healthy. Balance sheet leverage in both investment grade and high yield is at very comfortable levels. Interest coverage ratios are also strong but have been trending downwards due to higher interest rates increasing the debt financing burden. The problem is that credit valuations are priced for perfection. To be explicit, credit spreads are expensive but the yield on corporate bonds is still attractive due to high benchmark government bond yields.

Our strategy is therefore to be underweight credit risk, waiting for better valuations to increase exposure. Even though credit is expensive, we can still add value from stock selection. The spread dispersion across the US and European investment grade and high yield markets is elevated, creating alpha-generating opportunities.

To download the full quarterly strategy commentary, please click here.

Understand common financial words and terms See our glossary

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

The Funds managed by the Global Fixed Income Team: 

Consider environmental, social and governance (""ESG"") characteristics of issuers when selecting investments for the Funds. May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. Hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.  May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the funds over the short term. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. May target an absolute return. There is no guarantee that an absolute return will be generated over the time period stated in the fund objective or any other time period.

The risks detailed above are reflective of the full range of Funds managed by the Global Fixed Income Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.


This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.

Phil Milburn
Phil Milburn
Phil Milburn joined Liontrust in January 2018 from Kames Capital to co-create the Liontrust Global Fixed Income team. Phil previously spent over 20 years at Kames Capital, launching one of the market’s first strategic bond funds and developing a leading high-yield franchise.
Donald Phillips
Donald Phillips
Donald Phillips joined Liontrust in February 2018 from Baillie Gifford to co-create the Liontrust Global Fixed Income team. Donald had been co-managing the European high-yield strategy at Baillie Gifford since 2010 and previously worked at Kames Capital from 2005 to 2008.

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