LONDON (Reuters) - European investors have slashed their holdings of euro zone bonds to their lowest in at least five years and are shifting into emerging market debt in search of higher yields, the latest Reuters asset allocation poll shows.
Investors have become increasingly frustrated with the low or negative yields offered by developed bond markets, which touched record lows after Britain voted in June to leave the European Union, compounding the pain after years of monetary easing.
German bond yields out to 15 years are now in negative territory, meaning investors are effectively paying for the privilege of lending to the government.
Not surprisingly, in the July Reuters poll, European asset allocators voted with their feet, cutting euro zone bond exposure to 45.8 percent, down from 51.5 percent in June.
The survey of 15 fund managers and chief investment officers was carried out between July 15-27.
“Developed market bond yields have clearly been impacted by central bank policy,” said Jan Bopp, asset allocation strategist at Bank J Safra Sarasin. “Certainly, buying bonds with negative yields or an expected negative real return does not represent a good investment.”
Instead, poll participants raised emerging market bond allocations, almost doubling their Asia ex-Japan exposure to 1.7 percent. Latin American exposure jumped to 3.4 percent from 2.3 percent and allocations to African and Middle Eastern debt rose to 1.2 percent, versus last month’s 0.8 percent.
Flows into emerging market bond funds set a weekly record high of $4.7 billion in mid-July, according to data from JPMorgan.
European investors also boosted exposure to U.S. bonds to 29.9 percent from 28.1 percent in June, the poll showed.
Within their global balanced portfolios, investors’ overall bond exposure rose to 43.2 percent, the highest level in at least five years, and up from 41.4 percent in June.
They cut their overall equity holdings to 41.3 percent from 42.4 percent, and slashed their cash allocation to 6.5 percent, the lowest since February 2016.
However, government bond exposure declined to 49.7 percent, the lowest since last August. The share of investment-grade credit touched 20.7 percent, more than one percentage point higher than June.
Several poll participants said credit looked like one of the more attractive risk assets, even for those that favoured a risk-off stance, given the heightened uncertainty after June’s Brexit vote.
“We prefer what we believe to be a more attractive risk-adjusted returns profile in selected areas of credit, like investment-grade bonds,” said Boris Willems, a strategist at UBS Asset Management, adding that investor sentiment remained fragile following the British vote to quit the EU.
Investors were almost evenly split over whether global sovereign bond yields had bottomed out.
Raphael Gallardo, a strategist at Natixis Asset Management, thought yields had troughed in the short term, but structural problems affecting the global economy meant that G7 central banks would be forced to continue to provide further monetary easing.
Nadege Dufosse, head of asset allocation at Candriam, thought it was too early to call the bottom in global bond yields.
On the one hand, a repricing of the chances of a U.S. rate increase and improving inflation data could lend support to bond yields in coming months, she said. But on the other, monetary policies remained dovish, and the economic momentum in Europe could fade.
Additional reporting by Maria Pia Quaglia Regondi, editing by Larry King