Fixed income… anything but!
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.
- 2020 Economic and Market Outlook
- Finding income in changing markets
- The hunt for income– three things to look for
- Chasing growth: A history of the top 10 since the 1980s
- Tread carefully as the monetary safety net weakens
- A two-minute guide to diversification and the benefits of it
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