Boutique investment firm Appian Asset Management has cut its exposure to bonds amid fears the assets are over-valued.
The move comes in the wake of the recent turmoil on global equity markets, triggered by a leap in 10-year US government bond yields - a global benchmark - as inflation fears start to bite. It also follows mounting fears about a looming rout in fixed-income markets as central banks execute a phased retreat from quantitative easing (QE) over the next year or two.
QE has helped prop up stalling economies by pumping money directly into the financial system. But the change of course has prompted fears of a crash. Eugene Kiernan, head of Investment Strategy and Asset Allocation at Appian - which counts Pat Cox, the ex-president of the European Parliament as a board member - said the decision to cut all bond exposures from the firm's multi-asset funds was based on the expectation that "government bond yields will move up".
When bond yields rise the price of the bonds falls.
As a result, he said, "we don't see any potential value for our clients in the asset class".
According to Mr Kiernan, a former head of investment solutions for AIB Investment Managers, "inflationary pressures are building". While he cautioned an inflationary surge is not "imminent", he said inflation rates are "moving up, which will erode the real returns from bonds".
He added that "potentially higher inflation also strengthens the hand of central banks (particularly the US) as regards moving interest rates higher, which impacts negatively on bonds".
Appian's stance chimes with Bill Gross's bearish view on the sector. The billionaire bond veteran has long predicted a bond rout and last month publicly reiterated that fixed-income assets are in a bear market.
Gross has pinned the valuation decline (bond prices move inversely to yields) on the reduced QE 'cheque-writing' along with a 5pc nominal GDP, which he expects will produce higher 10-year Treasury yields, near zero percent total returns, and the legitimate characterisation of the beginning of a mild bear market.
Central banks resorting to QE on such a broad scale is unprecedented, and Mr Kiernan points out the retreat of "a large buyer who was price insensitive" will have an impact.