Fixed Income  

Bond managers predict ‘new normal’ of lower rates

The ‘new normal’ level of interest rates in developed markets could be half the average rate before the financial crisis, according to a growing consensus of bond managers.

Last month the US Federal Reserve began reducing its massive bond-buying programme, which had been providing economic support to the country, but US and UK central bankers have been at pains to reassure markets that interest rates were unlikely to rise until at least the middle of 2015.

Even though many bond managers accept rates will rise from their historic lows, several top managers believe the ‘normalisation’ of rates will not result in a return to the pre-crisis average of between 4 per cent and 6 per cent, and will instead settle at between 2 per cent and 3.5 per cent.

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Pimco’s Scott Mather, a deputy chief investment officer and manager of the $8.4bn (£5.2bn) GIS Global Bond fund, said: “There is going to be an uncomfortable period when nearly 0 per cent rates are going to finish. It is not going to be quick and it is not going to go back to ‘normal’.”

He said rates were more likely to settle at roughly 2-2.5 per cent, but predicted that the move would “not be a big market event” as central banks would act slowly.

M&G Investments’ star bond manager Richard Woolnough, in an interview with Swiss financial TV channel

Dukascopy, agreed that “normalisation will occur at a slow pace” because “the system has fundamentally changed”.

“Rates won’t go back to the traditional 5-6 per cent level; they are more likely to go back to 2.5-3.5 per cent in terms of short rates,” Mr Woolnough said.

“I think the system has fundamentally changed. The shock to the system from the banking crisis means the economic system is going to operate in a very different way in the next 10 years than it did in the previous 10 years.”

Jonathan Platt, head of fixed interest at Royal London Asset Management, also warned that the speed of any rate rise would be slower than currently priced in by bond markets.

He said: “We currently agree with the consensus view that yields will rise in 2014, although we are more cautious on the magnitude of this rise than the consensus. This partly reflects our view that the growth spurt that the UK is currently experiencing is not sustainable.

“Rising house prices will not cure the UK’s underlying problems, but merely mask some unpalatable truths: we are losing competitiveness – just look at the current account deficit.

“We are not increasing our productivity at an acceptable rate and business investment remains sluggish.”

Next month will mark five years since the Bank of England’s Monetary Policy Committee cut the UK’s base interest rate to a record low of 0.5 per cent following the bailouts of Royal Bank of Scotland and Lloyds Banking Group.

All eyes on rate setters

Janet Yellen