Hints from the US Federal Reserve that it may taper its quantitative easing programme have caused fears in the market, leading bond yields to rise substantially across the board. Yesterday, for example, yields on 10-year US Treasuries rose above the rate of inflation for the first time in more than 18 months.
This signals the bursting of the bond bubble, according to Jane, who adds that investors who have been piling into the overvalued assets for safety will not be able to offload them as yields rise.
Jane, manager of the £32m TM Darwin Multi Asset fund and former head of equities at M&G, says he is protecting himself against this development by steering clear of areas of the market that have benefited from the Fed’s monetary stimulus.
"The end of the bond bubble, which we have been warning about for some time, seems to be happening," he commented.
"As a result, the market is marching to a different beat and those areas that have benefited most from cheap money are suffering, particularly emerging markets, corporate bonds and certain Asian property markets."
"The pace of the moves, and the fact that they can be observed across several areas of the market, suggests that the market’s got the bit between its teeth."
"We have nothing in corporate bonds or emerging market equity; we sold our entire emerging market bond position last week and have trimmed our exposure to Asian property markets," he added.
However Chris Godding, head of global equity at Signia Wealth, says that although the outlook for bonds is not great, he expects yields to moderate, as the sell-off shows the Fed cannot put a stop to QE just yet.
"Our conclusion from the QE-tapering discussion is that whether intentional or not, the 'trial balloon' from the Fed has yielded some vital market intelligence on the impact of an exit strategy to central banks around the world," he said.
"We can expect to see more of the same over time but believe that in the short-term the negative feedback loop on the US economy, through the violent reaction in the mortgage-backed securities market, will lead to equilibrium in bond markets at lower yields than we see in markets today."
"The US economy and the recovery in real estate are not robust enough to absorb a brutal move up in borrowing costs. Yields will moderate from current levels as investors find an appropriate equilibrium."
"Emerging market debt and currencies will recover from the recent sell-off in response to lower US yields. However, any relief will be relatively short-lived and investors, like the Fed, should take heed of the lessons learned over the past few weeks."
"The bond bull market is over, each bear market rally will be an opportunity to sell and equities will only be able to progress in the face of QE fears if earnings revisions gain some positive momentum from stronger global growth," he added.
As Godding highlights, there has been a multi-decade rally in government bonds.
According to FE Analytics, the IMA UK Gilt sector has returned 177.53 per cent over the last 20 years.
However, as the graph highlights, those returns have tailed off in recent times and over one year the sector has lost 2.42 per cent.
Performance of sector over 20yrs
Source: FE Analytics
Neil Shillito (pictured), director of SG Wealth Management, says commentators who say a bond bubble is about to burst are being far too sensationalist, though he admits the outlook for the asset class does not look attractive.
"I think it is fair to say that bonds have had their day, but I am not a subscriber to the 'Armageddon theory' that people are talking about," he said.
"I don’t believe in the bond-bubble theory as I don’t believe they have been bought to the point of self-destruction. If you look over the last five years, bonds have been bought for all the right reasons."
"There is still good quality issuance, and though I do think the shift in US Treasury yields is significant, I don’t think it will signal a wholesale sell-off."
He says that investors who are looking to buy bond funds at the moment would be better off leaving the asset class alone for now.
"Bonds have been around forever and as people will be aware, the world’s bond market dwarfs the world’s equity market. Yields won’t compress any further from here as economies are beginning to recover."
"While we will still be laden with the debt burden for some time, politicians are ignoring it for the moment and saying 'who gives a monkey’s, we need to be elected'."
"Interest rates will eventually begin to rise but as markets are so forward-looking, bonds will be gradually offloaded in favour of risk assets, but how will that affect bond-holders?"
"I suppose it all depends on where about they are on the curve, but as an adviser to the retail market, bonds as an asset class – except for diversification purposes – aren’t a worthwhile investment in the current environment," he added.