Hodges: Bond Market Should Listen to the Fed

Nomura's Dickie Hodges says investors should listen to the guidance given by central banks to avoid the shock of interest rate rises

Emma Wall 15 May, 2018 | 7:45AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Dickie Hodges, Manager of the Nomura Global Dynamic Bond Fund.

Hello, Dickie.

Richard Hodges: Hi. Thank you.

Wall: So, on the walk to the studio you described this as the strangest market environment you have ever known as investor. What did you mean by that?

Hodges: Well, I mean, a lot of the market seems to be dislocated from each other. And if you are looking at the volatility of different asset classes, they represent volatility at different times. There's no coordination, and I think that's down to the uncertainty with regard to the future of central bank and their monetary policies and also, with regard to quantitative easing. And as we've become welcome or used to understand, quantitative this year from the European central bank will be coming to an end.

Wall: And where is there a little bit of certainty? Because it seems to be that the Fed will raise rates. That seems to be an understanding. But the speed and the level of those raises is where there begins to be more uncertainty.

Hodges: I think so. I think this was demonstrated very late last year. Bond markets and interest rate markets were only discounting a little over one interest rate rise at the beginning of November last year, where the Federal Reserve had been consistently telling us there will be three interest rate rises during 2018.

And indeed, at the last March report FOMC meeting the Federal Reserve Chairman Powell was telling us that we are indeed going to have three interest rate rises and that they would possibly be more moving into 2019. Now, the market has actually fully discounted this possibility now. So, what we are looking for is more indication of where we are going to see growth and where we are going to see market evolution of the course of the remainder of 2018 and into 2019.

Wall: So, is it maybe, as you seem to suggest, a bit more just about trusting what they are saying will be the truth?

Hodges: Yes. And sometimes it's very difficult to trust what a central bank could be saying. In each way they want to be transparent to give some certainty to the markets and to suppress volatility.

We have one or two weak numbers that come out of the U.K. economy, for instance, and suddenly, expectations of an interest rate rise in May of 2018 this month disappear and the probability that's priced into markets falls from the 90% probability to only a 20% probability within the space of one week. So, transparency is good, but consistency is something that markets need to actually value assets from.

Wall: As a global and dynamic bond fund manager you are probably better placed the most in the fixed income space because at least you have a plethora of levers to pull in order to find value. You are not tied to say just U.S. corporates, for example. Where are you seeing the best opportunities within that remit?

Hodges: Well, more historically and more recently we've capitalized against the rise of interest rates and the rise of government bond yields. I think it's less certain and you shouldn't make the mistake that bond yields are going to move higher during the course of 2018 and 2019 just because central banks have told us that interest rates are going to higher.

I see pockets of value in various different asset classes, from India, from emerging markets and certainly, over the course of the last three months emerging markets have cheapened significantly. So, if you are looking somewhere where you can gain some returns during the remainder of 2018, then I'd look into emerging markets space.

Wall: Dickie, thank you very much.

Hodges: My pleasure.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Nomura Fds Global Dynamic Bond A EUR H108.71 EUR-0.20Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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