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Debt market 'safe havens' might not be so safe, warns HSBC chief economist

Key Points
  • Market signals imply that future returns of global government bonds are going to be "negative in inflation-adjusted terms," says HSBC Global Asset Management's chief global strategist.
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Asset classes traditionally considered as "safe havens" for investors may be in a uniquely vulnerable position, a top HSBC economist has warned.

Relative pricing in investment markets over the past six months has forced global bonds and corporate debt into "very expensive valuation territory," Joe Little, chief global strategist at HSBC Global Asset Management, told CNBC.

Global bonds - a bond which is issued in several countries at the same time, typically by a large multinational corporation or sovereign entity – as well as other high-rated corporate debt, are typically considered "safety" asset classes for multi-asset investors.

The economic news about continued low inflation has made this promise credible, he explained, but the consequence of this environment has been the driving of global bonds and credits into "very expensive valuation territory."

"The bond risk premium (valuation of bonds versus cash) is now very negative for long-term global bonds in developed markets, and yield curves are very flat," Little said.

"These signals imply that future returns of global government bonds are going to be negative in inflation-adjusted terms."

This includes U.S. Treasury securities and their British and German equivalents, gilts and bunds.

What this means for investors is that if inflation picks up a little faster than expected, these assets are suddenly at risk, a small surprise that could have a big impact on market pricing.

This is a potential concern for multi-asset investors, with government bonds typically an asset class relied upon for safety and diversification within portfolios.

No recession coming

HSBC's house view is that there is a "slow-lilocks economy" at present, meaning global growth is below trend but steady and inflation remains subdued, both in advanced economies and the majority of emerging markets.

"This should be a reasonable environment for corporate profits, and it should be an environment that favors risk asset classes too," Little explained.

He also suggested that continued anxiety about impending recessions and bear markets, and ensuing "macro pessimism," was misplaced and the relied-upon recession indicators "bogus."

"We think we have been in a 'cyclical slowdown' – nothing more severe than that," Little added.

"Crucially, the global growth data is beginning to stabilize and improve now. That trend is taking place in the US, in Europe, and in China."

Dovish monetary policy in China, the U.S. and Europe over the past six months has helped stabilize the economic cycle and supported investor perceptions of growth, allowing debt assets to perform well.

"Core fixed income returns have been anchored by the policy pivot - by central bankers' promise of possible rate cuts and a lower for longer rate cycle," Little said.