Joe Little (pictured above), Chief Global Strategist HSBC, says government bonds may be past their heyday.

HSBC Global Asset Management’s latest quarterly outlook report suggests that investors should brace for a prolonged phase of low output ahead amidst a continuing COVID situation, high unemployment, and elevated savings. HSBC Chief Global Strategist Joe Little says that low bond yields may be around for a while given current macroeconomic trends, and that core bonds as an asset class may be a spent force. (CNBC)

Bonds are passé

Yields threaten to remain low for longer as the global economy slows after an initial recovery and investors should hunker down for range-bound markets and a coupon-clipping environment, says Little.

According to the strategist, though bonds were a great investment over the past decade, they are likely to fall by the wayside in an imminent “great rebalancing” of investor portfolios. Besides their low yields, the diversification properties of core government bonds are also under question.

Investors may therefore rotate out of bonds in a monumental shift in asset-class strategy and seek alternative strategies such as those embraced by institutions.

Alternatives to core bonds

Instead of core government bonds, hitherto so popular, investors may shift focus to commodities such as gold, inflation-linked bonds, and alternative investments.

“Alternative strategies, which have progressively been taking up a larger proportion of institutional strategic allocations, are another attractive option,” Little said.

“Investors willing to exchange portfolio liquidity for income can benefit from investments in securitized debt and infrastructure where valuations are attractive,” he added.

“Although returns of strategies that offer low beta to equities, low duration, and moderate volatility have been low in recent years, poor prospective returns on government bonds favor the increase of the allocation to liquid alternatives.”

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