Your IndustryAug 10 2015

Fixed Income – August 2015

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Approx.60min

    Fixed Income – August 2015

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      CPD
      Approx.60min
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      Introduction

      By Ellie Duncan
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      Volatility in bond markets has prompted investors to pull money out of fixed income funds, as the latest figures from the Investment Association reveals. In June this year, fixed income funds were the worst selling asset class for the second consecutive month with a net retail outflow of £198m. As the trade body points out, this is the largest outflow since January 2014.

      Iain Stealey, manager of the JPM Global Bond Opportunities fund, says: “If the past 30 years has been a one-way traffic for bond investors, the last six months have been anything but.

      “Once perceived as dull if dependable shock absorbers for a portfolio… bonds are recalibrating to a more volatile norm. As [Mario] Draghi warned investors earlier this summer, it’s time to get used to turbulence.”

      Luke Hickmore, senior investment manager, fixed income at Aberdeen Asset Management, agrees: “I think the only thing we’ve been able to expect in the last few years is it’s been very difficult to figure out what’s going on. You’ve had a whole host of different impacts on the fixed interest market this year – from [events in] Greece to the European Central Bank introducing QE [quantitative easing] – and all of those impacts have left people very nervous.”

      However, in spite of the short-term “noise” in global markets, the outlook for economies more generally is improving, Mr Hickmore says.

      “So we’re talking about growth in Europe for the first time in some while; maybe even a little bit of inflation,” he observes. “Inevitably, that all leads to one big question: when do interest rates move?”

      Speculation is mounting as to whether the US Federal Reserve will opt for a September rate hike, as many predict, or hold off until December before making the move.

      For Mr Hickmore it’s all about how investors prepare over the next few months for that inevitable increase in the US interest rate.

      He adds: “As you get closer to the potential shift by the Fed, protecting yourself towards the shorter maturities in your portfolio as the curve starts reacting to a potential rising interest rate is going to be very important.

      “But… I think once we get there, I’m expecting the Fed to be pretty modest with how quickly it shifts interest rates. So that ‘glide path’ to a normalised rate, which is probably only 2.5 per cent, could [take] two to three years.”

      Mr Stealey also questions the effects of rate rises.

      “So if we assume that the US Fed funds rate gets to around 3 per cent at the peak of the cycle, that suggests the US 10-year Treasury will reach about 3 per cent or slightly lower – not an enormously dramatic shift from where yields currently are at around 2.2 per cent.

      “Put another way, concerns that bond investors will experience painful losses as yields jump seems somewhat overblown. Instead, we should expect to see a gradual and steady increase.”

      For investors, this all means coming to terms with a lower return environment.

      Ellie Duncan is deputy features editor at Investment Adviser

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