Government bond yields in developed markets have risen from historical lows.
Is the bull market over? And how far can yields rise? These are two questions that are occupying bond investors’ minds. It’s difficult because while investors are nervous about being long bond risk, getting out too early has been a painful experience due to quantitative easing (QE).
Having been advocates of duration, we are now less enthusiastic. QE programmes in the US and UK seem to be ending, and global growth, while modest, is improving. We see scope for bond yields to start rising gradually. I emphasise gradually.
Uncertainty in Europe, and reluctance by US authorities to see the housing market choked off again by sharply higher Treasury yields, should cap potential yield rises. Closer to home, the core safe haven status of UK gilts could be under threat due to cessation of QE, uncertainty about MPC future policy following the new governor appointment, uncertainty in the direction of fiscal policy and the possibility of a change in the AAA credit rating. Normally, a one notch move would not be significant, but coinciding with difficult market conditions and political uncertainties may produce a disproportionate effect.
So we have reduced interest rate risk across several of our UK credit portfolios through a combination of selling gilts and longer dated bonds, increasing allocations to high yield and the use of interest rate swaps.
Source: http://www.ftadviser.com/2013/02/25/investments/fixed-income/reducing-interest-rate-risk-cc1ZFOHbo5ADZjJj4zigCN/article.html
Is the bull market over? And how far can yields rise? These are two questions that are occupying bond investors’ minds. It’s difficult because while investors are nervous about being long bond risk, getting out too early has been a painful experience due to quantitative easing (QE).
Having been advocates of duration, we are now less enthusiastic. QE programmes in the US and UK seem to be ending, and global growth, while modest, is improving. We see scope for bond yields to start rising gradually. I emphasise gradually.
Uncertainty in Europe, and reluctance by US authorities to see the housing market choked off again by sharply higher Treasury yields, should cap potential yield rises. Closer to home, the core safe haven status of UK gilts could be under threat due to cessation of QE, uncertainty about MPC future policy following the new governor appointment, uncertainty in the direction of fiscal policy and the possibility of a change in the AAA credit rating. Normally, a one notch move would not be significant, but coinciding with difficult market conditions and political uncertainties may produce a disproportionate effect.
So we have reduced interest rate risk across several of our UK credit portfolios through a combination of selling gilts and longer dated bonds, increasing allocations to high yield and the use of interest rate swaps.
Source: http://www.ftadviser.com/2013/02/25/investments/fixed-income/reducing-interest-rate-risk-cc1ZFOHbo5ADZjJj4zigCN/article.html
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