Bond Managers Prepare for Rising Rates

Many bond fund managers covered by Morningstar analysts have taken a cautious view on both interest rate and credit risk

Ashis Dash 15 March, 2018 | 2:27PM

Federal Reserve Expected to Raise Interest Rates

Bond fund managers reduced risk towards the end of 2017 and the start 2018. A key reason behind this was their view that market valuations were rich, and they expressed difficulty in finding bonds that were attractively priced. This is an issue that has become more and more pronounced as investors have snapped up bonds with even remotely attractive yields, driving up their prices; not to mention the impact of central banks, such as European Central Bank and Bank of England, through their bond-buying programmes.

Some funds that we cover in the more traditional Morningstar Categories, such as Sterling Corporate Bond, are running interest-rate duration – a measure of sensitivity to rate changes – at the lower end of their allowed ranges, which is not surprising given interest rates in the United States and United Kingdom are expected to move up; meanwhile, they have also reduced their credit risk profiles. Similarly, within the more unconstrained bond funds, many managers have also taken a cautious view on both interest-rate and credit risk, cutting back on both in absolute terms. We highlight some examples from our Morningstar Gold, Silver and Bronze-rated funds below. 

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About Author

Ashis Dash  is a Morningstar Fund Analyst

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