31st March 2015
Nicolas Trinade, manager of Elite Rated AXA Sterling Credit Short Duration Bond fund.
'Duration' is a term used in fixed income investing, to measure the sensitivity of a bond’s price for a given change in interest rates, expressed in years. The shorter the duration, the smaller the negative impact of a rise in interest rates.
So, in a year when we may finally see interest rates rise, in the US at least, if not the UK, it is a hot topic for fixed income investors.
Here, Nicolas Trindade gives FundCalibre his outlook view on interest rates, the forthcoming UK General Election and the fall in oil prices.
Rising interest rates
“This is going to be the year of rising interest rates in the US, at least. The Federal Reserve has now stated it will no longer be 'patient' but will make the move when the economic data supports it. With the current low inflation environment, we expect policy to remain unchanged in June and the hike in interest rates to happen in September.
“Back in the UK however, wage growth has been disappointing and inflation is absent, partly due to falling oil prices. Falling year-on-year inflation data has led to the prospect of negative inflation on the cards over the summer. We expect inflation to pick up again in the third quarter of the year and, to see the first rise in UK interest rates in February 2016.
“In Europe, the European Central Bank will have to continue its bond buying programme most likely until September 2016 to return inflation to 2% and boost growth. Therefore, we think interest rates will remain at current historical low levels for the foreseeable future in the Eurozone.”
UK general election
“Unsurprisingly, the UK general election will be a big influence on markets over the coming months. We have already started to see heightened volatility, particularly in the foreign exchange markets. This will only increase as we get closer to election day and even beyond, as it is becoming increasingly likely that we will see a hung parliament.”
Fall in oil prices
“Most of the negative impact from the dramatic fall in oil prices has been felt by oil-producing countries and the energy sector. Valuations may now seem attractive, but it is important to focus on strong companies with robust balance sheets enable to withstand low oil prices for an extended period of time.”
Focus on low duration
“What is key for me in managing my portfolio is not only diversification, but also ensuring a good balance between low duration and an attractive level of yield. Both are required in order to perform in a rising yield environment.
“In the next couple of years, a short duration focus will be crucial to preserve capital, by reducing interest rate sensitivities and overall volatility.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Nicolas' views are his own and do not constitute financial advice.