Bond Funds Which Survived Rising Rates

The past three months have seen bond markets struggle against a backdrop of rising rates and geopolitical tensions - which funds managed to hold firm?

Irene Ruiz Espejo 31 July, 2018 | 7:51AM
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Irene Ruiz Espejo: The second quarter of the year has seen many bond funds struggle as rates increased. The Federal Reserve raised rates two times in the first half of 2018 and signalled two further hikes to come this year, as inflation reached their target faster than previously forecasted and unemployment continued to fall.

The U.S. dollar strengthened against the euro, the pound and the yen over the quarter.

The European Central Bank reiterated that it would pare back its quantitative easing slowly but surely, while in Italy, a surprise collapse of coalition talks to form a government drove a dramatic selloff in government bonds.

Given this backdrop of rising rates and geopolitical tensions, the Bloomberg Barclays Global Aggregate Bond Index hedged to GBP lost 0.26% over the quarter and the global bond – GBP hedged Morningstar Category lost 1.03%. Funds with shorter duration and heavier U.S. dollar exposure were among the better performers for the quarter.

For example, sterling returns for Silver-rated M&G Global Macro Bond was 3.5% for the quarter with biases to that profile. The Bronze-rated government-only Newton International Bond fund also benefited from this environment and produced a return of 3.65% over the quarter, most of it owing to the managers’ underweight in peripheral European duration, particularly Italy, and US dollar duration.

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Irene Ruiz Espejo  is a Morningstar Fund Analyst