'Bond vigilantes' are selling Eastern European, Dubai, Irish and Italian debt and at some point will go for bigger bait, Guy Monson, managing partner and CIO of Sarasin & Partners, told CNBC late Monday.
"We could be going back into that bond market vigilante territory. Dust off your old sovereign trading skills," Monson told European "Closing Bell."
Global investors who demanded higher yields on US Treasury bonds from the late 1970s through the 1990s to hedge against inflation came to be known as "bond vigilantes." With low inflation and easy credit over the past 10 years, they had largely disappeared but now analysts say that they are coming back.
Triple-A corporate bonds will take on a new role versus government bonds, as investors may think that multinationals, such as Royal Dutch Shell , IBM or Nestle, could have better credit than some governments, Monson added.
But Sarasin, which manages over 8 billion pounds ($12.8 billion), has begun to buy Irish debt at the expense of German debt, and "…is looking at the possibilities in Greece," said Monson.
An IMF mission is set to visit Athens to discuss the country's budget management ahead of a crucial meeting between the Greek government and EU officials. Speculation has run high as to whether the IMF will be forced to step in to aid Greece if the European Union decides not to bail out its peripheral neighbor.
Monson is not so skeptical. "The Germans will ultimately come to the rescue of the peripherals, so a trade at the edge of the peripherals is a good one," he said.
The bigger players, in particular the UK, raise concerns, according to Monson. UK government bonds, also known as gilts, are in a high-risk period of "…some sort of event that could materially damage gilts from here."
- Watch Guy Monson and Michael Gallagher interviewed above.
Director of Research from IDEAGlobal Michael Gallagher agreed, saying that he could see 10-year gilt yields rising over 1 percent in the run up to the general election. Fears of a hung parliament in the UK have increased, clouding the outlook for the bond market as well as sterling.
Despite the uncertainties, Monson is keeping his eye firmly on the government bonds. "We think you will make a lot more money trading sovereign debt in 2010 than in corporate debt," he said.