Fixed Income

Fixed income flashback: is history going to repeat?

30/11/2014

Kellie Wood

Kellie Wood

co-Portfolio Manager, Fixed Income Core-Plus

Traditional financial theory portends that bond prices fall when interest rates rise. Yet, a bond’s total return comprises not just price changes, but also income. This is important because, as rates rise, the income on a bond can help offset falling prices, cushioning the overall total return.

For investors, the relevant questions are:

  • How much will the price fall?
  • Is there enough income to offset the price decline?

Low bond yields have driven a search for yield but also have fixed income investors concerned about rising interest rates and the effect on their portfolios. Many are cautious in choosing fixed-income investments given the potential for interest rate increases as economies continue to expand. However, rising rates do not necessarily mean negative total returns. While rising rates adversely impact bond prices, various sectors of the fixed income market respond differently and active portfolio management can help mitigate the impact on total returns.

So how can investors best position their portfolios for a rising rate environment? The answer starts with understanding the relationship between interest rates and fixed income returns.

Important Information:
Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person. This document does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice. Schroders may record and monitor telephone calls for security, training and compliance purposes.