The Federal Reserve Open Markets Committee (FOMC) increased the Federal Funds Rate by 0.25% in December and again in March. The rate is expected to rise twice again later this year from its current 1% to 1.25% then to 1.5%. The resulting Treasury bond yield rises have prompted fund managers to manage the duration of their securities more closely in order to not run an interest rate risk. The balance between the higher yielding, interest rate and inflation sensitive long-dated bonds compared to lower yielding short-dated bonds has come to the fore. Strategic bond funds have significantly moved to shorter-dated bonds with an average of 7 years being typical.
Any signs of the Fed hiking rates higher or ahead of expectations or the European Central Bank (ECB) and Bank of Japan (BoJ) tightening monetary policy would have an impact on bond prices and liquidity in the market. Most government bond markets will have seen capital losses when yields improve but there is a limit to how far yields may go as Central Banks both in Europe and Japan wish to continue with quantitative easing at least for the near term.
Investment grade corporate debt is offering higher yields than treasuries or gilts and with less volatility. Within the global fixed income markets, emerging
market local currency debt offer good value with higher yields and moderate volatility as concerns about rapid US$ valuation growth have eased.
It is against this background we have set out our portfolio recommendations.