Mark Dunley-Owen at Bermuda-headquartered Orbis Investments discusses why he believes bonds are attractive today, and why he has a preference for US bonds over the UK and France.

Despite concerns about rising yields, Mark Dunley-Owen, portfolio manager for the multi-asset strategies at Orbis Investments, has been increasing his exposure to bonds. He believes that US bonds are attractive, as well as those in Norway, Australia and Brazil.

“Rising yields are often seen as a warning sign, yet the ultra-low rates of recent years could have been the exception rather than the norm,” Dunley-Owen said at a media event in London. “Higher yields can also reflect stronger growth, raising questions about what they are really signaling, the opportunities and risks they present for bond investors, and whether the prevailing gloom is justified.”

In response to a lot of reports that have been particularly negative about bond yields over recent months as they have been getting higher. Dunley-Owen said this was due to a coming fiscal crisis in developed markets. “There are certainly times when rising bond yields indicate stress and there are countries where you expect that to be true like France and possibly the UK. But the US is not one of those countries,” he continued. “The US is the biggest bond market in the world. When I look at the US today and when I look at the rising bond yields, I think it’s very helpful. My interpretation of bond yields is that in a functioning, diversified capitalist economy like the US, it works.”

“The US tracks GDP growth. The higher the GDP growth is, the higher the bond yields are. What has surprised me over the last three to five years is how strong the US economy is. In an environment where the economy is growing, there is rising demand for capital and the return on capital is higher than it was five years ago,” he said. “The price of capital is going to go up. When I look at the US today, I think the 5 per cent yield on a 10-year bond indicates a strong underlying economy and as a lender, that is what I want.

“I want to lend to as strong a borrower as possible. I am not saying the US is being perfectly managed. There are a lot of things I don’t like about what they are doing but the underlying security I have when I own a US bond is that it’s stronger than it was five years ago. The return is high today.

“In 2021/22, the US tenure was 1.5 per cent. There was a view it would last forever and inflation would be low forever and monetary policy had changed. Today I can get 5 per cent on a US tenure so the return has got better. The risk is also better.

"The US economy has survived a series of shocks since 2020 that could have derailed the economy. I am more confident on risk versus returns than I was 5 years ago. We are still underweight in bonds. In our multi-asset funds, we have an underweight position but it is slowly creeping up and the value we see in bonds is much more attractive today,” he said.

On UK gilts, Dunley-Owen said that the UK is not falling apart. “Revenue is growing, GDP is growing but it is not growing as strongly as it could as the government is focusing on redistribution rather than growth. It is taxing the wealthy and redistributing it in the form of social packages,” he explained. “Growth won’t be as strong. Margins will get worse. The UK is underinvested in industrial assets in the last few years so it has fallen behind compared to the US and China. Oil and gas assets are also heavily taxed,” he continued. “The UK does have a strong education, legal and financial center but it is not as strong as 10 years ago. It doesn’t help putting increased tax on private education or that firms are listing in other jurisdictions.”

Overall, Dunley-Owen believes that the UK is slowly getting worse over time. “UK gilts deliver yields of 5 per cent, the same as the US, but there is no reason to lend to a lower credit country. There’s a lot I love about the UK but on a 20 to 30-year view, unless something changes, it does look challenging,” he said.

Dunley-Owen thinks the UK crisis is happening too slowly: “France’s crisis is at least speeding up so there’s hope at least some changes will be made. In some ways, you need things to get worse for the changes to be made for it to get better. Growth needs to be put first.” 

Although it has its challenges and it is also taxing the rich, Dunley-Owen likes Norway as its balance sheet is rock solid. In bonds, he likes Australia and he owns some Australian bonds. “There are also the highest returns on sovereign bonds in Brazil today with 15 per cent yields. It is not low risk. They keep inflation under control at 5 per cent and it should stay controlled,” he said.

Guinness Global Investors is also positive about the outlook for bonds and recently emphasized the benefits of US bonds. See here.