The threat of rising interest rates and the impact on Global Fixed Interest (GFI) returns continues to be a topical question for Zenith’s adviser clients. With the US Federal Reserve (Fed) progressing along its interest rate hiking cycle, the bond bears are predicting the end of the bond bull market.
With the Fed hiking rates the question remains, should investors rotate out of global bonds and into cash or term deposits? Is this a sensible capital preservation strategy?
At Zenith, we are more sanguine on the outlook for global bonds, preferring to focus on the structure and fundamentals of the underlying bond markets.
In our experience, the naïve approach of extrapolating potential losses from rate hikes (or movements in long bond yields) and benchmark duration, fails to consider the efficiency of bond markets, the importance of carry in GFI returns and the role of active management in protecting portfolios against capital losses.
Any decision to move out of bonds based on interest rate fears alone fails to consider the full picture.
In Zenith’s opinion, while there is the prospect of global bonds delivering flat returns in the short term, any such periods would be offset by a more attractive environment over the medium term.
The Efficiency of the Global Bond Markets
The relationship between global monetary policies and long bond yields changes over time and as such are inherently difficult to forecast.