As the US Federal Reserve closes its Quantitative Easing (QE) program, investors in fixed-income markets are being warned to expect some volatility. A natural response to expectations of volatility is to seek the proven benefits of diversification – reducing risk by investing in a broader range of securities that have a low correlation of returns.
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Earlier this year Rick Rieder, BlackRock managing director, chief investment officer of fixed income, fundamental portfolios, and co-head of Americas fixed income, issued a paper suggesting that it was “a good time for a fresh look at a wide range of fixed-income strategies”.
Robert Mead, a managing director and head of portfolio management in Australia for PIMCO, says that the likely direction of interest rates in the coming three to five years can’t necessarily be accurately gauged by looking at what’s happened before.
“The ‘new neutral’ means interest rates are going to stay lower for much longer,” Mead says.
“Trying to look at historical rate cycles or listening to the fearmongers [saying] rates are too low and they’ll have to go up significantly, I think is the last thing that planners or anyone else should be listening to…because it’s completely invalid.
“The reason rates have to stay lower for much longer is because the global system is still highly levered. Since the financial crisis, there’s essentially been no delevering of the global financial system. All that’s happened is leverage has moved from one pocket to another.
“So given that backdrop, the key message is: first of all, bonds can still play a very important role in the portfolio, not only as an income generator, and they continue to tick that box; but also as an anchor to all the other risk assets that are being held by investors.”
