InvestmentsOct 22 2015

Rate hike will improve bond liquidity

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Rate hike will improve bond liquidity

The first rate hikes by central banks will not cause retail investors to rush for the exit in bonds, Kames Capital’s Adrian Hull has said.

The fixed income product specialist said it may actually improve trading conditions by removing uncertainty.

Mr Hull said: “Liquidity has worsened in the last three months, but while it is not going to return to anything like pre-crisis levels, a rate hike will not make it worse. On the contrary, there is an argument that rate rises in the US and UK may actually improve liquidity by removing the uncertainty that pervades markets.”

US Treasuries and UK gilts have seen yields move sharply lower in the last three months as investors grow more concerned about the outlook for global growth.

Mr Hull said that while growth concerns have pushed back rate rise expectations, he still expects the US to hike rates at the start of 2016, with the UK to follow in the middle of next year.

He said: “Fixed income has a problem at the moment as few investors favour it. Some areas – such as high yield and emerging market debt – now look attractive on valuation grounds, but sentiment remains poor.”

Adviser view

Steven Williams, director of London-based Evolve Financial Planning, said: “At Evolve, we use fixed interest as a volatility dampener within our client’s portfolios and, as we are very much into systematic investment processes, we are not driven by short-term market movements.”