Fixed Income

Fixed income… anything but!

06/09/2013

Simon Doyle

Simon Doyle

Head of Fixed Income & Multi-Asset

The last 3 months have been a difficult time for bond investors. Accumulating evidence of a recovery in the US economy prompting the US Federal Reserve to declare that “tapering” of the existing QE program would likely commence before year end was the catalyst. US 10 year bond yields have subsequently risen from 1.6% to 3.0%, while Australian 10 year bond yields have risen from 3% to over 4% over the equivalent timeframe despite broad based signs of domestic economic weakness. The reality of this sharp rise in yields for most fixed income investors has been lower returns (at least in the short run), albeit higher yields improve the medium term outlook.

While we have been arguing for some time that for a variety of reasons bond yields were unsustainably low, we think it timely to revisit the challenges this current difficult environment poses for investors – whether they hold fixed income investments or not. In this article we:

  • revisit the rationale for holding fixed income investments;
  • highlight the implications of rising bond yields for portfolio returns;
  • discuss how uncertain the outlook for bond yields remains (despite the consensus view); and
  • discuss the implications for investors in the context of the broader investment portfolios, in particular the idea that the strategies investors are considering to overcome these issues may end up causing investors the opposite results to those intended.

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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.