Cerulli: Bond Funds Ready for a Comeback in 2019

European bond funds have become more attractive thanks to a recent rise in volatility, according to a Cerulli report released Monday.

Following a tough 2018, the re-emergence of volatility in 2019 would be particularly advantageous for high-yield funds.

The wind-down of quantitative easing drove poor performance last year, said Brian Gorman, a European retail analyst at Cerulli, via email Monday.

“Most bond funds experienced negative performance and outflows followed, with high-yield bond funds hardest hit on both counts,” the report said. Emerging markets vehicles foundered during the same time period. “Some emerging market bonds, for example, had had such a strong year in 2017, especially when returns are expressed in U.S. dollar terms, there just had to be some pullback in 2018,” Gorman wrote in the email.

The desire for less risky investments has driven the bond markets up in the past few weeks, according to Cerulli.

The safest haven is German government bonds, according to a statement from André Schnurrenberger, managing director of Europe at Cerulli. Yields on the country’s 10-year notes reached 0.08 percent earlier this month, the report said.

“There could yet be a return to the situation of 2016, when investors were paying to hold German debt,” said Schnurrenberger in a statement. In July that year, the German government issued debt at a negative 0.05 percent interest rate. “Investors became so worried that they wanted to go into the really safe havens, even if it meant a small loss, which is better than a big loss,” Gorman explained via email.

Those with a higher risk tolerance could profit in emerging markets or high-yield corporate securities, according to Schnurrenberger.

The two areas have become more attractive as volatility has increased. Some investors, according to the report, may use a “fallen angel” strategy, investing in formerly investment-grade products that have been downgraded to junk bonds.

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In emerging markets, investors can not only benefit from increased volatility, but also from inclusion in JPMorgan Chase indices, which expanded last year, according to the report.