BondsAug 4 2017

Rathbones' Jones on preparing a bond fund for rate rises

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Rathbones' Jones on preparing a bond fund for rate rises

A veteran bond investor has revealed how he is preparing his portfolio for the likelihood of rising interest rates in the coming years.

Bryn Jones, who runs the £820m Rathbone Ethical Bond fund and the £90m Rathbone Strategic Bond fund, said he has been buying bonds with a shorter duration to maturity compared to those being acquired by his peer group average.

Bonds with a shorter date to maturity offer protection from interest rate rises, as the chance of the investor suffering a capital loss as the bond's value falls in line with a rate rise is reduced by the fact the bond reaches maturity sooner.

Mr Jones said his view on rates differs from his rivals - he is more expectant of interest rates rising in the near future than are his peers - and so he is taking more action to protect his portfolio from interest rates rises.

Charles Hepworth, investment director at GAM, said generally the market is expecting UK interest rates to rise to 0.5 per cent in March of 2018. 

But Mr Jones's said his peers are not positioning for that.

He feels buying bonds with a long date to maturity is a "risk not worth taking" when the market view is that rates will rise within a year.

He was speaking prior to the decision of the Bank of England's Monetary Policy committee voting on 3 August to keep rates at the current level of 0.25 per cent.

Sterling and the yield on UK government bonds both fell in the aftermath of the announcement, as Bank governor Mark Carney cut his forecasts for UK economic growth this year and next. 

Mr Jones said Bank of England governor Mark Carney “messed up” by cutting interest rates in the immediate aftermath of the EU referendum vote.

“The economic data was reasonable at that time, and has been reasonable since. The effect has been to weaken the currency and to push up inflation,” he said.

The fund manager said he has been buying floating rate notes (FRNs), and UK mortgage bonds, because interest rates rising doesn’t lead to defaults in the short-term.

Floating rate notes are bonds with an interest rate that moves in line with inflation, rather than being a fixed rate as with most bonds, and because rising inflation is one of the ingredients likely to lead to higher interest rates, FRNs offer protection from rate rises.

"Central banks tend to put interest rates up when the economy is doing well, they only put interest rates up to curb inflation when you have the sort of hyper-inflation that has happened in emerging markets," he said.