The relentless focus on credit risk in the bond market can be a bit abstruse for ordinary investors, who generally prefer the tales of fabulous growth to come that tends to dominate the discourse around equities. However, the bond market this year will probably be the object of greatest interest because the expected shift in yields, and the consequent release of cash, will profoundly affect the overall market. We had already identified the fact in our Christmas issue ('Not if, But When', 20 December - 2 January) that the possibility of increased yields in the sovereign bond market will be a dominating theme for 2014.
Almost everyone expects yields at the top end of investment grade bonds to rise as money flows into cash to take advantage of better short-term rates. That is the theory, at least, but too much agreement is also a sign of a herd mentality (not one investment bank is calling for a fall in yields, according to bond specialists at Canaccord Genuity) and bond investors should in fact be looking to trade in and out of the investment grade market as gilts, Treasuries and bunds will be acutely sensitive to market sentiment, unlike high-yield bonds which will be less so. In such a finely balanced investment environment, it is worth going over the basics of the signs to look for in the sovereign bond market.
Duration, duration, duration