How Can Investors Find Protection from Falling Bond Yields?

Within the fixed income arena, current market conditions mean the ‘barbell’ strategy has lost its ability to preserve capital in times of stress

Hermes 4 July, 2016 | 12:45PM
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Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Fraser Lundie, co-head of Credit at Hermes Investment Management and Andrey Kuznetsov, Senior Credit Analyst discuss deconstructing fixed income: how to find protection in the new bond world.

The current environment of rising correlations and falling yields means investors are compelled to seek alternative defences, as the traditional diversification ballast of a mix of lower and higher risk assets is no longer effective. This means challenging and rethinking widely held approaches to portfolio management. Within the fixed income arena, current market conditions mean the ‘barbell’ strategy has lost its ability to preserve capital in times of stress and investors need to challenge traditional assumptions around risk and where to find protection.

Ability to Preserve Capital is Diminishing

The reality is that investors need to recognise the decreasing ability of fixed income to preserve capital.  We have already seen this in effect during 2013’s taper tantrum, where both risk assets and bonds declined together. This was an important portfolio stress test which investors should heed and draw lessons from.

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About Author

Hermes  Hermes is a multi-asset fund manager offering global institutional and pension fund clients access to a broad range of specialist, high conviction investment teams.

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