7 April 2015

Building bond portfolios has rarely been more complex. Global government bond yields, already at historic lows in the wake of the 2008 crisis, have been pushed even lower by the recent actions of central banks: UK 10-year government bonds in the UK currently yield less than 2%. Before the 2008 financial crisis, that number was above 4%.

With yields at such low levels, it has become increasing difficult for investors to seek out returns from fixed income. Meanwhile, the prospect of surprise central bank actions (for example, the Swiss National Bank’s removal of the franc’s minimum exchange rate floor) introduces the potential for bouts of volatility, nervousness and unseen risk into an asset class that has traditionally been viewed as a safe-haven in times of market stress.

The rush to ease

More than 20 central banks have eased in 2015, mainly through rate cuts, but years of quantitative easing, particularly in the UK, US, Japan and now the eurozone, has led to a shortage of high-quality, long-duration assets and liquidity challenges for bond markets. Volatility and illiquidity in fixed income do not tend to mix well.

The Fed approaching lift-off from zero rates

2015 also looks set to be the year that the Federal Reserve (and possibly the Bank of England) tighten monetary policy, introducing the potential for interest rate rises and therefore significant risks to capital for fixed income investors.

A flexible approach

Our clients have been very vocal about the challenges they are facing in fixed income. My response is generally this: don’t attempt to second guess the central banks, instead be prepared to react. I strongly believe the current fixed income environment requires a truly flexible approach to investing, which is why we launched our new BlackRock Fixed Income Global Opportunities Fund for the UK market last month.

Beyond benchmarks

Managed by Scott Thiel, Rick Rieder and Bob Miller – who have experience of running similar strategies for BlackRock such as BGF Fixed Income Global Opportunities – the Fund is ‘unconstrained’ with no obligation to beat a benchmark. This gives the team the necessary freedom to look broader across geographies and deeper into capital structures to seek out returns – particularly from those assets that are less sensitive to rate rises. Such flexibility also enables the team to react quickly as markets adjust to monetary policy decisions.

My colleague, Dorian Hughes, recently interviewed Scott Thiel to get his outlook for the remainder of 2015. Watch the video of their discussion to find more about the team’s investment approach. Scott will also be a regular contributor to this blog, so look out for his regular updates on overcoming the challenges your clients face in fixed income markets.


This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 7 April 2015 and may change as subsequent conditions vary.
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Our clients have been very vocal about the challenges they are facing in fixed income. My response is generally this: don’t attempt to second guess the central banks, instead be prepared to react.