Fears are growing of a bond bubble that could spell trouble for millions of investors who have piled into the market in search of a safe haven. Haig Bathgate discusses the threat with Jeff Salway of The Scotsman.

Experts are lining up to forecast a sharp correction in the bond market that would hit pension savers particularly hard as they approach retirement.

UK investors ploughed nearly £6 billion into bond funds last year, Investment Management Association figures show, reflecting impressive returns and an aversion to equities.

That has changed in recent weeks as the stock market rally has tempted investors back into equity funds.

Now there's a rapidly expanding school of thought that believes both government bonds (gilts) and corporate bonds are set for sharp falls.

Haig said:"We should be doing as much to highlight the bond bubble as possible, as it will be the retail investor who is likely to get
hit with the losses when they come – which I'm very confident they will."

A recent Turcan Connell Asset Management report on gilts explained that QE means the market is currently abnormal. Gilt prices have been kept artificially high through the purchases, which now account for a third of all gilts in issue, the note said."It is likely that this programme could be reversed in the near future, leading to a flood of the bonds re-entering the market, which under normal laws of economics would mean a steep decline in the value of these assets," it added.

One concern is that when prices start to fall, a flood of withdrawals could cause a liquidity crisis – where bonds will be difficult to sell on – and possibly force fund managers to bar investors from taking their money out.

Liquidity is already becoming an issue, according to Haig.

"Underlying corporate bond market liquidity is significantly less than it has been historically," he said, pointing to a
recent shrinkage in the operations of the investment banks that are the main"market makers" in corporate bonds.

Not all commentators believe a correction is on the cards, with some pointing out that it would need an interest rate rise – and that remains a distant prospect.

However, it wouldn't take a massive plunge to cause problems for pension investors nearing retirement. That's due largely to the practice of lifestyling, where pension funds gradually move investors out of equities and into cash and bonds as they get closer to retirement.

The idea is to limit the potential of losses from which they have little or no time to recover. A large proportion of pension investors in their late fifties and early sixties are in such funds, meaning they 
have significant exposure to bonds. The approach depends on gilts and bonds being low-risk assets, and that's where the doubts now lie.

Getting out of gilts and bonds entirely isn't necessarily the answer, however. How you respond depends on your circumstances, and it's worth seeking advice from an IFA as to how you should best position your investments.

This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.