Time to position for rising rates and bond yields?

Fixed-income expert highlights risk, investment horizon and transparency as key themes

Time to position for rising rates and bond yields?

A fixed-income expert said investors should be getting their portfolios in order after the markets tumbled, reacting yesterday to rising yields and the prospect of more rate hikes. 

The S&P hit its lowest mark in three months, the Dow Jones dipped as much as 836 points and the Nasdaq dropped 4%. The TSX, meanwhile, had its worst day in more than three years, closing down 336.65 points to 15,517.40.

The losses on Wall Street triggered a frenzy of selling around the globe, with Europe suffering heavy losses this morning, Asian markets taking a hit and Australia's benchmark index rocked by its worst one-day fall since February.

Despite the booming US economy, expectations of further rate rises have pushed up bond yields, drawing money out of the stock market. The US's ongoing trade dispute with China also played a part in the freak-out but Marina Mets, managing director at FTSE Russell Canada, said we’ve been in an unnaturally low-yield environment for a long time, which has supported bull markets elsewhere.

She said: “We have been talking about positioning for a rising-rate environment for several years. It hasn’t come but I think those hikes are being priced in to most markets and most portfolios.

“We’ve run a series of research to be able to support our users in showing them what a rising rate environment means for long-dated portfolios and what it means for extending duration. Of course, the longer duration the more sensitivity you have.”

Mets said she is as keen as anyone to watch what the Bank of Canada does next but she said the market is pricing in at least a couple of moves over the coming year.

She highlighted the FTSE Russell’s 0+ Universe Bond Index as a tool to help investors position their portfolio, allowing them to see their securities through to maturity and shorten duration exposures.

Mets said that given the rise in bond yields, the rate-rising environment and the impact this is having in the equity markets, advisors should be looking at risk and clients’ investment horizon, adding that the theme of transparency is increasingly central.

She said: “It’s kind of understanding what is in your portfolio; what those exposures mean to you in both the global macro-economic and also domestic-economic position for both rates and credit and what those exposures are actually allowing you to do – even at the total portfolio level.

“How do you levy between your fixed income and equity exposure. We have a series of products coming online that do that type of multi-asset type of levy. More and more, we talk to our clients about risk measurement and management tools that provide an ability to measure your holdings and measure your exposure. Information is key, right.”

Mets has also recently written a blog about ensuring benchmarks remain representative, highlighting research that showed that, in the past 10 years, the index is holding a greater number of securities with larger individual issue size, whereas securities with a smaller size have continued to be captured in similar numbers.

She added that one result of the consultation was the increasing of the minimum size threshold in te government space will be going from $50 to $100 million starting from January 1.

Follow WP on Facebook, LinkedIn and Twitter